> For the complete documentation index, see [llms.txt](https://docs.hoodfun.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.hoodfun.xyz/how-it-works.md). # How it works When someone buys a token on hood.fun, USDC is routed to the backing LT's vault, which mints new LT in the same transaction. That LT enters the token's bonding curve, and the buyer receives the token in return. Selling reverses the process: the token goes back into the curve, the LT is redeemed for USDC, and the seller receives USDC. The bonding curve tracks its balance in LT units, not USD. The curve's LT balance grows from buys and shrinks from sells, like any normal bonding curve — but on top of that, the *USD value* of everything already sitting in the curve floats with the LT's own NAV. A token can appreciate purely from the underlying asset moving in the LT's favor, with zero trading activity. ## Example 1. A token is launched with HOOD5 (5× long HOOD) as its reserve. 2. A trader buys $100 worth of the token. 3. Over the next day, HOOD goes up 10%. Nobody else buys or sells. HOOD5's NAV rises by roughly 5 × 10% = 50% (before funding and rebalancing drag). The trader's $100 position is now worth roughly $150 — purely from HOOD moving, not from new buyers. ## Leveraged tokens (LTs) Every hood.fun bonding curve holds a leveraged token as its reserve asset. Each LT is a keeper-rebalanced, non-liquidating position on Lighter (Robinhood Chain's native perp exchange), wrapped as a standard ERC-20 and minted/redeemed at a signed NAV. LTs hold a target leverage (HOOD5 is fixed at 5×) through automatic rebalancing by an off-chain keeper. This lets the LT track its leverage through a sustained trend without the holder ever managing margin or facing liquidation directly. ## Tradeoffs Constant leverage through rebalancing has a cost. In a choppy, sideways market, rebalancing bleeds value out of the LT even if the underlying ends up flat — this is decay. LTs work in the holder's favor during sustained trends and against them during chop. Higher leverage amplifies both effects. For the full mechanics — NAV formula and decay math — see [Risks & Security](/risks-and-security.md). --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## 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, and the optional `goal` query parameter: ``` GET https://docs.hoodfun.xyz/how-it-works.md?ask=&goal= ``` `ask` is the immediate question: it should be specific, self-contained, and written in natural language. `goal` is optional and describes the broader end goal you are ultimately trying to accomplish on behalf of the user. GitBook uses it to tailor the answer towards what is most useful for that goal. 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.