Introduction

Mooncake is a permissionless leveraged token market. It uses a structured design to split the USD value of any token into two components: a Leveraged Position and a Funding Position.

• Leveraged Position: Tracks the price fluctuations of the underlying token in USD terms. Holders of Leveraged Positions gain exposure to market volatility but need to pay a funding fee.

• Funding Position: Earns the funding fees paid by Leveraged Position holders, denominated in USD.

This structure allows users to create leveraged exposure without liquidation risk while offering yield opportunities for funding providers.

$$Underlying\ Token\ Value =Funding\ Position\ Value + Leveraged\ Position\ Value$$

This formula means that the dollar value of one underlying token can be split into two parts:

• Funding Position: A stable USD-denominated claim that earns funding fees.

• Leveraged Position: A residual claim that amplifies the price exposure of the underlying asset.

Example: 2X Leveraged SOL

Suppose the underlying token is SOL, and the target leverage of the Leveraged Position is 2x

If 1 SOL = $200, we can split it as:

$$SOL\ (\$200) = Funding\ Position\ (\$100) + Leveraged\ Position\ (\$100)$$

• The Funding Position is like a stable $100 note, collecting funding fees.

• The Leveraged Position represents the “risky” part of SOL. Because it only costs $100 but still moves with the full $200 SOL price, it effectively gives 2x leverage.

If the price of SOL increases from $200 to $220 — a 10% gain — then the value of a leveraged position would rise from $100 to $120, representing a 20% increase.