Leveraged Tokens Overview
https://toros.finance/?category=Leverage
Last updated
https://toros.finance/?category=Leverage
Last updated
Toros Finance offers a suite of leveraged tokens, providing users with exposure to various assets using two different underlying protocols: Synthetix Perpetuals and AAVE. Each protocol operates differently to achieve leverage, allowing for a range of trading strategies and risk profiles.
These tokens use a combination of complex smart contracts from dHEDGE. In simple terms, they have an in-built automated system that adjusts the positions to keep the vaults within a predefined safe range of leverage. This system is designed to maintain what's called a Target Leverage Ratio (TLR), which helps manage the risks associated with leverage backed by collateral.
Toros leverage tokens are best used for short to medium term directional upside. Single direction movements can exceed returns compared to typical perp leverage products. This is because Toros increases leverage as the underlying asset's price moves favorably to maintain the leverage range, giving returns that may resemble power perpetuals.
All Toros leverage tokens have built-in protection against downside liquidation. For example, if you had held a typical -2X ETH Short perp from March to May 2021, you would have been liquidated several times over as ETH went up in price. Holding the Toros Ethereum Bear -2X however, would have protected you from liquidation. This is because Toros rebalances on price movements to maintain the leverage range. When a Toros token decreases in value, its leverage also adjusts down to maintain the TLR.
In sideways (up-down) markets, Toros vaults can underperform typical leverage positions. This is known as Volatility Decay. Toros vaults work similarly to Leveraged ETFs. They maintain a leverage range by rebalancing. When the underlying asset price moves in favor of the strategy (eg. ETH price going up in a Ethereum Bull token), then the strategy rebalances to maintain the same leverage exposure. Likewise if the market underlying price moves against the token (eg. price going down against a Bull token), then the strategy rebalances to maintain leverage and avoid liquidation.
Volatility decay occurs through the leverage rebalancing, rebalance fees, and borrowing costs. Toros vaults are therefore intended for short to medium term directional bets for best results.
To minimize volatility decay, the strategy only rebalances once leverage threshold targets are exceeded (eg. in a 3x Bull, the thresholds are set between 2.8x and 3.2x). This means that the strategy does not need to rebalance excessively and as a result minimizes the volatility downside of the strategy, whilst maintaining the upside exposure.
Note that higher higher leverage is also prone to higher volatility decay and could underperform ETH even in a positively trending market. This is why Toros leverage tokens don't offer leverage above 4x.
When withdrawing, the Toros token price displayed is the last 'best' value based on the Chainlink prices of the underlying assets. Sometimes the inter block Chainlink price diverges from on chain market price of those assets. In this case, when unwinding the leveraged Toros position, the slippage can be higher than expected (amplified by the leverage). We recommend 2-3%, but usually it will be < 1%.
