BNB2x-ALI FAQs Part2
BNB2x-ALI provides investors with an extraordinary experience during a bull market or an overall upward market sentiment. However, it would be beneficial for the investor to be aware of some scenarios and the potential risks.
Q1. What’s the difference between BNB2x-ALI and Simple Leveraged Position?
Compared with the simple leveraged position, the returns of using BNB2x-ALI are not easily predicted given the same trade.
In a typical simple leveraged position, your returns are multiple of the underlying asset’s returns. Thus, if you take a 2x or 3x position on BNB for instance, your expected returns would automatically be equivalent to your leveraged position i.e. double or triple returns on BNB.
However, the ALI product has a different mechanism.
- First, the target ratio of ALI ranges from 1.7x to 2.2x instead of a fixed ratio like 2x.
- Second, the expected returns of using BNB2x-ALI shares similarities with the simple leveraged positions within a shorter time span based on the target ratio. However, in the long term, the returns deviate from the leveraged returns due to the frequent rebalancing.
Considering the previous example, a 10% return on BNB within a week, has a probable chance of returning up to 1.7 to 2.2x on BNB2x-ALI. However, it will be less predictable within a month or a year. Especially in a fluctuating or bear market, there will be difficulty in predicting the performance of all leveraged assets.
Q2. What’s the performance of BNB2x-ALI in the event of a major market correction?
BNB2x-ALI may lose significant value during a major market correction
It’s important to note that BNB2x-ALI helps to shield you from liquidation risks in the event of a major price correction. This, however, does not guarantee 100% protection.
BNB2x-ALI was built with a rebalancing mechanism that initiates a counteraction if the price of BNB plunges drastically. This automatically reduces leverage as a means to ensure you’re still operating within safety bounds.
Please be aware that, in the event of a major price drop, you may still suffer a significant amount of loss. Although, the chances of liquidation are very low.
Q3. Are there any risks of liquidation?
There is the risk of liquidation in the event of a complete market crash
There’s no liquidation in BNB2x-ALI, however, much of the risk lies in Cream Finance where the underlying assets BNB are deposited. Cream Finance makes use of bots to ensure the safety of collateralization ratio maintenance when prices drop. But, if a sudden market crash takes place, these bots may not have the capacity to respond swiftly, which could result in the liquidation of an asset’s leveraged position.
Q4. Any technical risks on Smart Contracts?
The importance of Smart contracts to the reliability and automation of BNB2x-ALI cannot be overemphasized. However, as much as they help to facilitate a higher level of transparency and security, they are also prone to bugs and could be exploited by hackers.
Also keep in mind that BNB2x-ALI is still in Beta.
Q5. Any other risks on BNB2x-ALI?
There could also be Third Party Protocol Failure risks besides the performance and technical ones.
For smoother operation and composability, BNB2x-ALI utilizes various decentralized protocols. If any of these protocols reach a point of failure, the functionality of BNB2x-ALI will be affected.
The third party protocols include lending protocols like Cream Finance, which is used for borrowing more USDC; and decentralized exchanges like PancakeSwap, which is used to swap BNB/USDC pairs. In addition, ALI makes use of both Chainlink and Cream Finance’s native oracle as its source for price information.
ALI will also be exposed to risks if any of those protocols develop issues with liquidity, speed or other issues.