Margin trading is one of the most commonly used trading mechanisms on traditional stock markets. Decentralized margin tokens allow anyone to quickly and easily take a leveraged position on a given token.
What is Leveraged Long ETH (LETH)?
Leveraged ETH (LETH) is a tokenized leveraged "long position" on ETH.
LETH's price correlated directly with the price of ETH: if the price of ETH goes up by $1, the price LETH goes up by $1 (and vice versa).
Margin Tokens (like LETH) allow users to significantly amplify the swings of their portfolio.
How is Long ETH priced?
To understand how margin tokens are priced, it's important to understand that these tokens have dates, collateral, and leverage associated with them.
LETH tokens are designed with a 28 day open period, after which the long position expires and becomes fixed to the market price. The expiration date of the long position is clearly defined in the token name both on DDEX and within the LETH contract:
In the example above, the long position lasts until January 30th. After which the token price is fixed to market price, and can be exchanged at anytime.
When a new LETH token is created, the price is based on the following formula (source: Expo Trading):
Price (LETH) = Current ETH price - Borrowed amount per unit * Interest
and Interest = e ^ (Interest Rate * #days_since_start / 365)
The borrowed amount per unit is different for every version of the LETH token.
As of today, this looks like:
Leverage is the factor that a margin token moves compared to the underlying asset. Larger leverage yields greater price swings. Consider the following example, based on 1/15/2019 numbers:
Current LETH price = ~$54.25 | Current Leverage = ~2.24x | Current ETH price = ~$121.89
Let's assume that the price of ETH increases 5% in value to ~$127.98
This is a $6.09 increase in price, so LETH's price will also go up by $6.09. Leverage indicates that LETH's relative value should then increase by 2.24 * 5% = ~11.2%
To check this:
LETH price = $54.25 + $6.09 = $60.34 (which is ~11.2% up. Checks out!)
A margin call occurs when the price of the asset drops below a threshold minimum value. Typically this occurs with very large price swings in the underlying asset (ETH). This is a mechanism to make sure that the collateral in the token contracts is enough to cover all parties.
A margin call results in an automatic dutch auction at the current price. The token position is considered closed in the same way that a token position closes after the time expiration.
Margin tokens like LETH allow users to leverage a long position on ETH, amplifying the swings of their portfolio. Each LETH position lasts for a maximum of 28 days. We will list new LETH tokens continuously on DDEX. For more information on LETH and other margin tokens, please see the links below.
As always, if you have any questions feel free to reach out in any of our support channels.
More information on Margin Tokens and dydx:
dYdX Margin Token Paper: https://margintokens.dydx.exchange/
expo trading FAQ: https://help.expotrading.com/frequently-asked-questions
dYdX Website: https://dydx.exchange/