Rebalancing mechanism

Erosion of NAV

When market conditions are volatile, the system frequently rebalances in order to maintain a fixed leverage ratio. This can erode the net asset value (NAV) of leveraged tokens.

For leveraged tokens that have a fixed leverage ratio, the rebalancing system starts adjusting the user's position when the actual leverage ratio begins to deviate from the target. As an example, let's suppose that a user buys a bullish leveraged token:

When the price of the underlying asset increases, the actual leverage ratio decreases, so the rebalancing mechanism increases the user's position. At this time, if the price of the underlying asset begins to fall, it triggers the system to perform a "top position addition". This causes further losses as the price of the asset goes down, which leads to greater loss of the user's total funds, thereby causing the erosion of net asset value (NAV).

When the price of the underlying asset falls, the actual leverage ratio increases, so the rebalancing mechanism reduces a user's position to lock-in the loss. At this time, if the price of the underlying asset begins to increase, it triggers the system to perform a "bottom position reduction". Even if the price recovers, the losses of the user's total funds cannot be recovered, thereby causing the erosion of net asset value (NAV).

teeter does not adjust its underlying assets in order to avoid the erosion of its net worth caused by price change. But because positions are not adjusted and leverage multiple changes can cause net worth to become zero or even negative in extreme price situations. In order to solve the NAV problem under extreme conditions, teeter adopts a rebalancing mechanism to balance the inferior floating returns to avoid the NAV hitting zero or negative values and entering a forced liquidation.

Rebalance

In order to prevent the fund from liquidation and to ensure that the leverage is maintained in the general range of 1.4-10x, teeter uses a rebalancing mechanism. this mechanism will occur when the spot price drops or rises sharply. This process is entirely automatic and will be completed by smart contracts according to market. no manual intervention is needed from the user.

The mechanism works by reducing the leverage multiple while adjusting the unsold shares of the preferred and inferior floating income funds, but simultaneously ensuring that the value of the funds held by the holders of the preferred and inferior funds remains unchanged.

• The leverage multiple is equal to the leverage multiple set at time t0

• The unsold value of the subordinated fund will equal the priority fund divided by the leverage multiple at time t0 minus the sold share of the subordinated fund

• The unsold share of the subordinated fund will equal the unsold value of the subordinated fund divided by the current net value of the subordinated fund

NV performance with or without rebalance mechanism