**Are leveraged tokens a cryptocurrency?**

** **

Leveraged tokens are not cryptocurrencies. Leveraged tokens are financial derivatives with properties similar to traditional leveraged ETFs. Like traditional leveraged ETFs, leveraged tokens are zero-day investments, and new quotes are available all the time. The net value of leveraged tokens changes synchronously with the underlying assets, and the trend is highly correlated with the underlying assets, which is very close to the trend of the underlying assets. Therefore, when the underlying assets tracked rise or fall, the leveraged tokens will rise or fall.

Leveraged tokens are not like mutual funds. The net value of the fund is calculated after the market closes on the day, and the price of all stocks, bonds and other assets invested by the fund is calculated. Generally, it is calculated according to the closing price, so there is only one net value price per day. .

The token characteristics of leveraged tokens are limited to trading methods like other tokens, which can be bought and sold in the spot market. So keep in mind that leveraged tokens are not cryptocurrencies because leveraged tokens are not on-chain and issued in limited quantities.

**2: Is the issuance of leveraged tokens fixed? How does ****ZT**** increase the issuance of leveraged tokens while ensuring that the net value of leveraged tokens will not be distorted?**

As mentioned above, leveraged tokens are similar in nature to traditional leveraged ETFs. Traditional leveraged ETFs are open-end funds, and users can freely buy and sell in the secondary market, as well as subscribe for redemption. Since leveraged tokens allow users to subscribe and redeem, the issuance of leveraged tokens is not fixed. As the issuer of ZT leveraged tokens, ZT can increase the issuance of leveraged tokens according to market liquidity and user requirements.

When ZT creates more leveraged tokens, ZT Perpetual Futures positions will also be added to the basket of each leveraged token, and the operation information for increasing ZT Perpetual Futures positions and creating more leveraged tokens is public and transparent. How does ZT prove that when more leveraged tokens are created, the net value of leveraged tokens will not be affected? Below is the formula for equity. If ZT just creates more leveraged tokens without increasing the perpetual contract position of the basket of each leveraged token, the equity will get lower and lower. But since ZT is creating more leveraged tokens and also increasing the perpetual contract holdings of each leveraged token basket, the leveraged token equity will not be distorted.

Equity = ((1/True Leverage)*Basket*Underlying Asset Price)/Number of Issued Tokens

ZT's perpetual contract positions for creating more leveraged tokens and adding leveraged token baskets are public, and users can obtain this information on the ZT leveraged token homepage and rebalancing history.

**Why is the performance of leveraged tokens out of sync with the underlying assets?**

For example, the increase of BTC assets in the past 24 hours is -10%, the net value of BTCDOWN leveraged tokens has not increased, but has fallen by 50% in the past 24 hours? (Assuming that the leverage of BTCDOWN is a fixed 3 times)

The rate of return of any financial product cannot just look at the change in asset price (end-beginning). The price of leveraged tokens keeps track of the price changes in the perpetual contract market, and the leverage level rises and falls accordingly. Therefore, the net value of leveraged tokens is subject to the millisecond price movement of the underlying asset, the perpetual contract, and continuous compounding. The formula is P(n) = P(0) * (1 + Delta)! , where P(n) is the latest price, P(0) is the initial price, and Delta is the percentage change of the asset per unit time.

For example, at T0, x base asset is 10USDT, assuming xup leveraged token is 3 times long x asset, and xdown leveraged token is 3 times short x asset, the initial price of xup and xdown leveraged tokens is 10USDT.

Assuming x asset experiences price fluctuations in 5 seconds, how would xup and xdown leveraged tokens perform in just five seconds?

Time |
x base asset price |
x rate of increase in underlying assets |
Xup leveraged token price increase rate |
xup leveraged token price (USDT) |
xdown leveraged token price Increase rate |
xdown leveraged token price (USDT) |

T0 |
10.00 |
- |
- |
10.00 |
- |
10.00 |

T1 |
9.00 |
-10.0% |
-30.0% |
7.00 |
+30.0% |
13.00 |

T2 |
10.00 |
+11.1% |
+33.3% |
9.33 |
-33.3% |
8.67 |

T3 |
9.00 |
-10.0% |
-30.0% |
6.53 |
+30.0% |
11.27 |

T4 |
11.00 |
+22.2% |
+66.7% |
10.89 |
-66.7% |
3.76 |

T5 |
10.00 |
-9.1% |
-27.3% |
7.92 |
+27.3% |
4.78 |

∆ (T5 - T0) |
0% |
-20.8% |
-52.2% |

From the end of the period (T5) to the beginning of the period (T5), the increase rate of x's underlying assets is 0%, but the increase rate of xup is -20.8%, and the increase rate of xdown is -52.2%. Therefore, it is incorrect if we judge the increase of leveraged tokens by the difference between the end of the period and the beginning of the period, because this ignores the real-time price changes of the underlying assets and the effect of continuous compounding.

**Why has the x base asset returned to the price at the beginning of the period, but it is very difficult for the xup and xdown leveraged tokens to return to the original price?**

Let's take the simplest unleveraged portfolio. If you lose 10% one day, you won't be able to break even if you gain 10% the next day. If a $100 investment loses 10%, you will only be left with $90; if you make a 10% profit the next day, you will only gain 10% on top of the $90, and you will end up with only $99. Obviously, this is not at all what you would expect.

Why isn't the breakeven point of a 10% loss not a 10% gain? In fact, according to the basic algorithm of mathematics, we should take how much you have now as a starting point, and from there work out the necessary rate of return.

Suppose your portfolio is currently $100. If you lost 10%, your portfolio would be $90. If you wanted to make up the $10 your portfolio lost, you would have to earn 11.1% (10/90 x 100%) to convert your portfolio value to its original value, which is $100.

Therefore, if the portfolio suffers a loss, it needs more profit than the loss to reach the break-even/break-even point. The chart below shows the return required for a portfolio to breakeven at different levels of loss.

Portfolio Loss |
Return Required to Recover Loss |

10% |
11% |

20% |
25% |

30% |
43% |

40% |
67% |

50% |
100% |

60% |
150% |

70% |
233% |

80% |
400% |

90% |
900% |

As shown above, the larger the loss, the higher the return required to break even. For leveraged tokens, this kind of erosion is a frequent occurrence. Not only that, but if a fund is leveraged, this erosion is doubly magnified.