Rebalancing Mechanism

The rebalancing mechanism is the process by which a leveraged product adjusts its holdings to maintain a constant leverage ratio. If the underlying asset price rises, the product must increase its exposure to maintain the target leverage; if it falls, it must decrease its exposure.

This is typically done automatically by the protocol at fixed intervals or when a specific threshold is reached. While this keeps the leverage constant, it requires buying high and selling low in certain market conditions, which contributes to volatility decay.

The efficiency and frequency of this mechanism are key factors in the performance of leveraged tokens. It is the automated engine that allows these products to function without user intervention.