Rebalancing

The rebalancing mechanism is a key component for maintaining the leverage factor of a leveraged token within a targeted range.

Common perpetual futures exhibit frequent changes in their effective leverage. This occurs because price fluctuations of the underlying asset affect the margin-to-notional ratio. Leveraged tokens counteract this fluctuation by reactively rebalancing the margin-to-notional ratio as soon as an outer bound of the targeted leverage range is reached. This is achieved by directly adjusting the amount of borrowed funds of the underlying perpetual futures contract.

These adjustments are triggered by an off chain monitoring and execution system, which uses Hyperliquid's API Wallets feature to modify the position of the leveraged tokens, without exposing functionality to transfer or withdraw funds.

The margin-to-notional ratio defines your effective leverage.