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DOI: 10.4230/LIPIcs.AFT.2024.23

A Shortfall in Investor Expectations of Leveraged Tokens

Authors: Reza Rahimian and Jeremy Clark

Published in: LIPIcs, Volume 316, 6th Conference on Advances in Financial Technologies (AFT 2024)

Abstract

Leveraged tokens (LVTs) are emerging crypto-assets primarily issued by centralized exchanges. The concept is borrowed from leveraged ETFs (LETFs) in traditional financial markets, which offer higher gains (and higher losses) relative to price movements in the underlying asset. Leverage is commonly used by short-term traders to amplify returns from daily market shifts. However, LVTs have been implemented differently from LETFs by exchanges in the crypto market, with variations across platforms. We examine the mechanics and constituent components of LVTs, demonstrating that the lack of a standard has resulted in deficiencies and unexpected technical and economic outcomes. To identify existing problems, we analyze more than 1,600 leveraged tokens from 10 issuers. Our analysis reveals that 99.9% of LVTs are centralized, with 80% lacking blockchain interaction, leading to transparency issues. Total supply information is difficult to access for 53% of them, and 41% appear inadequately backed at launch. Additionally, 97% of LVTs are vulnerable to front-running during well-known events, and they deviate from their stated leverage ratios more than LETFs, partly due to inconsistent re-leveraging processes and higher management fees. This work provides a framework for crypto investors, blockchain developers, and data analysts to gain a deep understanding of leveraged tokens and their impact on market dynamics, liquidity, and price movements. It also offers insights for crypto exchanges and auditors into the internal functionalities and financial performance of LVTs under varying market conditions.

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Reza Rahimian and Jeremy Clark. A Shortfall in Investor Expectations of Leveraged Tokens. In 6th Conference on Advances in Financial Technologies (AFT 2024). Leibniz International Proceedings in Informatics (LIPIcs), Volume 316, pp. 23:1-23:24, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2024)

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@InProceedings{rahimian_et_al:LIPIcs.AFT.2024.23,
  author =	{Rahimian, Reza and Clark, Jeremy},
  title =	{{A Shortfall in Investor Expectations of Leveraged Tokens}},
  booktitle =	{6th Conference on Advances in Financial Technologies (AFT 2024)},
  pages =	{23:1--23:24},
  series =	{Leibniz International Proceedings in Informatics (LIPIcs)},
  ISBN =	{978-3-95977-345-4},
  ISSN =	{1868-8969},
  year =	{2024},
  volume =	{316},
  editor =	{B\"{o}hme, Rainer and Kiffer, Lucianna},
  publisher =	{Schloss Dagstuhl -- Leibniz-Zentrum f{\"u}r Informatik},
  address =	{Dagstuhl, Germany},
  URL =		{https://drops.dagstuhl.de/entities/document/10.4230/LIPIcs.AFT.2024.23},
  URN =		{urn:nbn:de:0030-drops-209599},
  doi =		{10.4230/LIPIcs.AFT.2024.23},
  annote =	{Keywords: crypto-assets, ethereum, leverage, derivatives}
}

Document

DOI: 10.4230/LIPIcs.AFT.2023.22

Fast and Furious Withdrawals from Optimistic Rollups

Authors: Mahsa Moosavi, Mehdi Salehi, Daniel Goldman, and Jeremy Clark

Published in: LIPIcs, Volume 282, 5th Conference on Advances in Financial Technologies (AFT 2023)

Abstract

Optimistic rollups are in wide use today as an opt-in scalability layer for blockchains like Ethereum. In such systems, Ethereum is referred to as L1 (Layer 1) and the rollup provides an environment called L2, which reduces fees and latency but cannot instantly and trustlessly interact with L1. One practical issue for optimistic rollups is that trustless transfers of tokens and ETH, as well as general messaging, from L2 to L1 is not finalized on L1 until the passing of a dispute period (aka withdrawal window) which is currently 7 days in the two leading optimistic rollups: Arbitrum and Optimism. In this paper, we explore methods for sidestepping the dispute period when withdrawing ETH from L2 (called an exit), even in the case when it is not possible to directly validate L2. We fork the most-used rollup, Arbitrum Nitro, to enable exits to be traded on L1 before they are finalized. We also study the combination of tradeable exits and prediction markets to enable insurance for withdrawals that do not finalize. As a result, anyone (including contracts) on L1 can safely accept withdrawn tokens while the dispute period is open despite having no knowledge of what is happening on L2. Our scheme also allows users to opt-into a fast withdrawal at any time. All fees are set by open market operations.

Cite as

Mahsa Moosavi, Mehdi Salehi, Daniel Goldman, and Jeremy Clark. Fast and Furious Withdrawals from Optimistic Rollups. In 5th Conference on Advances in Financial Technologies (AFT 2023). Leibniz International Proceedings in Informatics (LIPIcs), Volume 282, pp. 22:1-22:17, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2023)

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@InProceedings{moosavi_et_al:LIPIcs.AFT.2023.22,
  author =	{Moosavi, Mahsa and Salehi, Mehdi and Goldman, Daniel and Clark, Jeremy},
  title =	{{Fast and Furious Withdrawals from Optimistic Rollups}},
  booktitle =	{5th Conference on Advances in Financial Technologies (AFT 2023)},
  pages =	{22:1--22:17},
  series =	{Leibniz International Proceedings in Informatics (LIPIcs)},
  ISBN =	{978-3-95977-303-4},
  ISSN =	{1868-8969},
  year =	{2023},
  volume =	{282},
  editor =	{Bonneau, Joseph and Weinberg, S. Matthew},
  publisher =	{Schloss Dagstuhl -- Leibniz-Zentrum f{\"u}r Informatik},
  address =	{Dagstuhl, Germany},
  URL =		{https://drops.dagstuhl.de/entities/document/10.4230/LIPIcs.AFT.2023.22},
  URN =		{urn:nbn:de:0030-drops-192112},
  doi =		{10.4230/LIPIcs.AFT.2023.22},
  annote =	{Keywords: Ethereum, layer 2, rollups, bridges, prediction markets}
}

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Documents authored by Clark, Jeremy

A Shortfall in Investor Expectations of Leveraged Tokens

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Fast and Furious Withdrawals from Optimistic Rollups

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