Originally thought about in the TLX Discord.

Currently, TLX leveraged tokens work by rebalancing to maintain a leverage within a range to avoid liquidations, which is what causes "volatility decay". It only rebalances after hitting the leverage bound (or on deposit and withdrawal) and also incurs swap fees.

Volatility decay would not be a factor if there were perfect rebalancing, i.e. maintaining a perfect constant leverage and having no swap fees.

My scheme: The synth aims to track a perfect constant-leverage index. People can borrow against collateral to mint these synths (let's say ETH2L) and short it by selling ETH2L. On the other side, people can long by buying ETH2L off the market.

Shorters get liquidation risk while longers don't, which could be an issue for getting people to mint in the first place, but they could be compensated by trading fees and fees on the token itself.