Before we released the float alpha, we released this article which outlined the various risks associated with using the protocol. TL;DR we talked about “apeing in responsibly” in light of the risks inherent to DeFi: smart contract risk, composability risk, network risk, centralisation risk, oracle risk, stablecoin risk and financial risk.
Given we’ve been live for a lot longer now, we feel it's important to continue to shine a spotlight on the risks associated with using the Float Alpha.
Long/Short positions may not behave as you would expect
The value of your long or short position may not behave how you expect it to behave because of both volatility decay and liquidity shifts. These concepts can often be overlooked and lead to situations where the value of the position is different to what one may naively expect.
Volatility decay refers to the phenomenon where leverage assets provide returns that are less (or more) than one would expect due to the compounded sequence of leveraged returns not being equal to a single leverage return one may expect over time. The greater the volatility, leverage and time over which the token is held, the greater the effects of volatility decay. We ran a workshop where we took a deep dive into the concept to explain it further.
Liquidity shifts refer to Float's unique mechanism where long and short liquidity trade against each other on a pure supply and demand basis. When liquidity is shifted between sides, the exposure to the long or short position can rapidly change in line with the liquidity shift. This can lead to situations where exposure is higher or lower for certain periods leading to value changes that may be different to what you expect.
These two effects in tandem can be difficult to decompose and separate. They both have a significant effect on the value of the position and can make the value of the position different from what you would expect.
The Float Alpha is live on both polygon and avalanche. Black swan events on any of these chains could cause users to lose some or all of their funds in unexpected ways. Please be aware of these chains and the risks associated with them.
Extending this from the previous article, the Float Alpha deposits underlying funds into Aave, Benqi, Trader Joe or other borrowing and lending protocols. While the decision has been made to use more well-known yield providers, this introduces further risks. Please assess the safety of these protocols and ensure you are fully aware of how they operate.
Float uses DAI as the collateral to back positions. Issues with DAI would likely have knock-on effects in the float alpha.
Even though the Float Alpha is tested and audited, there is no guarantee of safety when using the protocol and users should not use any funds in Float that they are not prepared to lose.
We are aiming to make these risks more and more clear every single week in an effort to build and release this new technology responsibly. We continue to build and improve the system, with safety as our number one priority.
Float allows you to get perpetual, leveraged exposure to any crypto asset, without worrying about liquidations or managing debt positions.
Our alpha deployment is live on Avalanche and Polygon, with eight degen markets ready for you to ape into.
To learn how the protocol and our Magic Internet Assets work, read our docs.
Get live updates, new features, opportunities and shitposts on our Twitter.
Or, meet the team, claim your gem role, and hang out in our Discord.