# How does FPLT v1.0 work

### Tokenization of Leveraged Positions¶

As the name indicates, FinNexus tokenizes the decentralized leveraged products into ERC-20 tokens. These tokens are fungible and can easily be transferred.

Tokenization will make it extremely easy for holders to take fixed leveraged exposures. By simply buying tokens and holding them, traders will automatically and passively take leverages.

For example, ETHBULL 3x means that the token is longing ETH and taking a 3x leverage with ETH exposures. If ETH goes up by 1%, the token will go up by 3%. An ETHBear 3x token shorts ETH with a 3x leverage. If ETH goes up by 1%, the token will go down by 3%.

### Net Value and the ‘Anchor’¶

FinNexus’ leveraged tokens are fully backed with cryptoassets and their net value can be calculated by live price feeds. The net value of leveraged tokens is an important indicator when evaluating the financial performance of leveraged holdings.

The net value of a leveraged token is calculated as the value of total assets subtracting total debts. When drafting a balance sheet for the token, the net value will be equivalent to the ‘net assets’ in equities.

To make the tokens easier to comprehend and trade, FinNexus protocols designate the initial value/price for leveraged tokens as $100. This initial ‘price’ is regarded as the ‘Anchor’. If the price of a leveraged token becomes too low and the market is unfavorable, the protocol will restore the price to its initial anchor, and adjust the quantity of the token accordingly. The mechanism shares similarities with rebasing, as the quantity of the token holding will be subjected to changes according to the asset’s price when rebalancing. To maintain the continuity and smoothness of the price curve, in the FPLT v1.0, the rebasing price is set to be$10.

If we are making a balance sheet for the token, the total asset is $300 and the total liability is$200, which makes the net value of the token $100. In other words, the leveraged token is fully collateralized. If the ETH price rises by 50%, due to the 3x leverage, the leveraged token price will be $100×（1+50%×3）=$250. According to the ‘balance sheet’, the total asset in ETH will be worth $300×(1+50%)=$450, while the total liability will still be $200, as it is borrowing stablecoins. Therefore, the net asset/equity of the token will be 450-450-200). Again, the leveraged token is fully collateralized. These considerations remain true when the ETH price drops. Full collateralization is a fundamental aspect of FinNexus’ leveraged tokens. ## Creation and Minting¶ When users buy FinNexus leveraged tokens, the same amount of tokens is minted by smart contracts. A series of transactions take place upon the receipt of the consideration, priced in stablecoins or the underlying assets. For example, imagine a user buying 1 unit of ETHBULL (3x) token with USDC, supposing the net value is$120. Let us assume there is no transaction cost or slippage and the token has not rebalanced yet.

After receiving $120 USDC, the contract will invoke the function needed to borrow $200 USDC from the pool, which is two times the "anchor" net value of the token. Then, the 320/320/120). For the creation of an ETHBEAR (3x) token, the process would be slightly different. For every ETHBEAR (3x) token,$200 ETH will be borrowed from the pool and sold through decentralized exchanges for stablecoins.

## Redemption¶

In the FPLT v1.0, when the FinNexus leveraged tokens are "sold" on the market, they are actually redeemed, which also triggers a series of transactions. The same amount of the leveraged tokens is burnt and the purchasing transactions are reversed, with the remaining balance paid back to the holders.

For example, if the value of ETHBULL (3x) token is $110, the balance sheet of the token comprises$310 ETH in total assets and $200 borrowing in total liabilities. When 1 unit of the token is sold/redeemed, the mechanism sells the ETH for$310 and repays the $200 debt, leaving$110 as the remaining balance to be transferred to the seller.

For redeeming an ETHBEAR (3x) token, ETH will be bought back from the market to repay the ETH debt. The remaining balance will be transferred to the seller.