Our tokens intend to provide a desired return over a one day period. These returns are a multiple of the percentage change in the underlying crypto for the 24 hour period. Therefore, they need to rebalance daily in order to achieve the appropriate asset levels to provide the implied exposure.
At 5 CET everyday, we will capture the current token value in the smart contract and compare that with the current USD price of the reference crypto asset to determine the new exposure levels. In the event the leverage factor has changed due to price action, a reset will take place to move it back in line. This periodic resetting means that a constant leverage factor is maintained for every holder over that one-day period.
Below is a brief explanation using whole numbers for simplicity sake for a -1x token
USDC in Smart Contract: 20,000 USDC
Bitcoin Borrowed in Token: 1 BTC
Current Bitcoin Price: 10,000 USDC
Total Token Supply: 100
20,000 - 10,000*1 = 10,000 (we refer to this as the Net Token Value)
For tokens that provide -1x exposure, there should always be a 2:1 ratio between the amount of USDC in the contract and the USDC amount of BTC that is borrowed.
At 5 CET, lets assume that Bitcoin falls by 1% to $9900:
USDC in Smart Contract: 20,000 USDC
Bitcoin Borrowed in Token: 1 BTC
Current Bitcoin Price: 9,900 USDC
Total Token Supply: 100
20,000 - 9,900*1 = 10100
Ratio of USDC in the contract to the amount of Bitcoin Borrowed is 2.020202
To get the ratio back to 2:1, we would need to increase the Bitcoin borrowed to 1.020202. Our trading engine would then submit an order to a lending desk to borrow 0.020202 to then sell on a trading venue at a price of 9,900 - lets pretend the price of Bitcoin doesn't move every second :) - to bring us with the below amounts
USDC Amount: 20,200 USDC
Bitcoin Borrowed: 1.020202 BTC
Current Bitcoin Price: 9,900 USDC
Total Supply: 100
20,200 / (9,900*1.020202) = 2