Each leveraged token gets its price action by trading FTX perpetual futures. For instance, say that you want to create $10,000 of ETHBULL. To do so you send in $10,000, and the ETHBULL account on FTX buys $30,000 worth of ETH perpetual futures. Thus, ETHBULL is now 3x long ETH.
You can also redeem leveraged tokens for their net asset value. To do that, you can send your $10,000 of ETHBULL back to FTX, and redeem it. This will destroy the token; cause the ETHBULL account to sell back the $30,000 worth of futures; and credit your account with $10,000.
This creation and redemption mechanism is what ultimately enforces that the leveraged tokens are worth what they're supposed to be.
- None of this is investment advice.
- Much of the below analysis ignores any difference between futures and spot prices, and ignores the effects of fees.
- Leveraged tokens greatly reduce the risk of liquidation but cannot make it fully impossible; if markets instantaneously gap down 50%, there is nothing that can stop a +3x leveraged position from getting liquidated.