Crypto startup Amun announced today it is shutting down operations of its popular leveraged token offerings to focus on other new products. Four of the five current Amun products will be discontinued.
We believe in building accessible, safe, and efficient tokens that can provide our communities with easier access to the complicated world of crypto. On that note, we’re working on something innovative that reflects this mission and will be sharing more soon. /2
— Amun Tokens (@AmunTokens) December 11, 2020
“We’re sad to announce that we’ll be shutting down the operations of our leveraged tokens — BTC3L, BTC3S, ETH3L, and ETH3S — as we focus on other projects,” the firm said, adding it would build safer, easier, and more efficient tokens for communities to access the “complicated world” of crypto.
Leveraged tokens are an innovative offering that uses low-to-medium leverage (from 1x to 3x) to buffer up returns. This means that if Bitcoin rises by 3% in a day, a long (that bets on higher future prices) leveraged token like Amun’s BTC3L will increase by 9%, while a short (that bets on lower future prices) leveraged token like BTC3S will decrease by 9% on the same day.
Each day at a particular time (5:30 GMT in Amun’s case), such leveraged tokens undergo a “rebalancing,” meaning the profits (or losses) from the previous day are adjusted and a compounded position is then opened.
Amun’s tokens were priced by aggregating order books from several crypto derivatives exchanges. Users could either deposit stablecoins at Amun, which would then initiate futures positions, or purchase and trade the tokens outright on exchanges like Bitcoin.com, Liquid, and HitBTC.
There were plenty of advantages. Token holders didn’t need to pay the high funding fees associated with borrowing funds to leverage trade or maintain sizable collateral.
However, there were some rather peculiar disadvantages as well. Due to the nature of leverage tokens, offerings inherently suffer in volatile market conditions and rapidly lose value.
For example, in a normal futures position, an asset may move against a trader’s entry price without the trade losing money unless they closed at a loss (traders can wait for prices to move in their favor days later and bank profits) or the prices reached liquidation levels.
But as leveraged positions rebalance daily, (i.e., they don’t truly track the prices of the underlying asset) a fluctuating market would mean the value of leveraged tokens erode significantly, and may not even reach previous levels even if the underlying asset recovers.
This was why crypto exchange Binance delisted several leverage tokens in March, claiming its users didn’t understand how they worked (before later adding its own leveraged tokens).