# Leverage Coin The **Leverage Coin** is the junior tranche of a Covenant Market: a fungible equity claim on the Base Asset collateral pool, minted when collateral is deposited and redeemable back to the Base Asset on demand. A Leverage Coin gives its holder leveraged exposure to the Base Asset's price, plus any native yield the asset produces (for example, the staking yield in stETH or the strategy yield in a tokenized vault), in exchange for paying funding to Yield Coin holders. Effective leverage is set by the market's loan-to-value: $$\text{effective leverage} = \frac{1}{1 - \text{LTV}}$$ A market running at 80% LTV gives Leverage Coin holders 5x effective leverage on the underlying. Leverage is structural rather than synthetic: a Leverage Coin holder does not borrow against collateral, so there is no loan to repay, no margin account to maintain, and no liquidation price to monitor. ## Where the return comes from Leverage Coins capture the residual Base Asset NAV in a Covenant Market after the Yield Coin NAV (notional). Their return has three components: 1. **Leveraged price exposure** to the Base Asset. A 1% move in the Base Asset price translates into a roughly *effective leverage* × 1% move in Leverage Coin value. 2. **Leveraged native yield**, where the Base Asset itself is yield-bearing. The full yield stream of the underlying flows to Leverage Coin holders. 3. **Funding cost** paid to Yield Coin holders, accruing continuously as a transfer of NAV from the Leverage Coin to the Yield Coin (rather than a separate cash payment). When the implied rate is negative, the transfer reverses and the Leverage Coin's claim grows at the Yield Coin's expense. For a Base Asset with native yield `y` and a market funding rate `r` implied by the Yield Coin price, the Leverage Coin's net carry (before price moves) is approximately `(y × effective leverage) - (r × LTV / (1 - LTV))`. In cheap funding environments this carry can be strongly positive; in tight funding environments it can be negative, in which case the Leverage Coin holder relies on price appreciation to outpace funding drag. ## Who it's for Leverage Coins are designed for users who want concentrated, leveraged exposure to a specific Base Asset: * **Leveraged-yield strategies and structured product issuers** who want a single ERC‑20 expressing a leveraged carry position, without running a recursive deposit/borrow loop; * **Directional traders** who want amplified long exposure to a Base Asset's price without a margin account or liquidation watchlist; * **Onchain credit and basis traders** who want to express a view on the funding rate by sizing their position into the junior tranche. ## Risk profile Leverage Coin holders are first in the loss waterfall: they absorb declines in the Base Asset's value (i.e. losses on the collateral) before Yield Coin holders are affected. The maximum loss is the Leverage Coin notional, never more than the holder's deposit. There is no liquidation event for any individual position; the protocol does not force-close junior positions when LTV rises. Instead, the Latent Swap AMM reprices leverage continuously, so the cost of holding a Leverage Coin rises smoothly with leverage demand. In normal operation, funding drag is the dominant risk: if the Base Asset's price stays flat and its native yield is low, Yield Coin NAV grows against the Base Asset NAV over time, eroding the Leverage Coin's claim. Holders manage this by sizing the position against their view on price and funding cost. ## Key properties * **Single ERC‑20, embedded leverage.** No looping, no per-position margin account, no liquidation price. * **Permissionless mint and redeem.** Leverage Coins can be minted by depositing the Base Asset, swapped into via the Latent Swap AMM, and redeemed back to the Base Asset at any time. * **First-loss against the Base Asset.** Junior in the waterfall; absorbs losses on the collateral ahead of Yield Coin holders. * **Captures full underlying yield (where applicable)** at the market's effective leverage, less funding paid to senior holders. * **Per-market exposure.** Each Leverage Coin is redeemable to its specific Base Asset, not pooled across markets. --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.covenant.finance/covenant-intro/leverage-coin.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.