Keep reading for the transcript below.
Seth Melamed (SM): Hello all, I’m Seth Melamed, COO of Liquid Group. We’re joined today by Ophelia Snyder, who is the president and co-founder of the AMUN Group. I’m really excited to do this interview, as these are really interesting products that are being introduced to the crypto industry, and I can’t think of a better person to tell us about these products.
First, could you tell us a little bit about the background of yourself and how you got into crypto?
Ophelia Snyder (OS): I have a fairly unconventional story of how I ended up in crypto! My background was originally in traditional finance. My transition to crypto came because of my interest in financial infrastructure, the plumbing that makes our financial world work. One of the things I found out several years ago (I started following crypto in 2013), was how many manual processes exist in our traditional banking infrastructure - how much “humans typing into spreadsheets” is part of how our world works! Which is actually quite terrifying, if you think about the amount of money that’s going through it. And crypto seemed like a natural extension of an easier way to do that, an easier way to manage financial infrastructure, an easier way to do simple things like money transfers, a much cleaner set-up.
That’s how I got interested in crypto. A very infrastructure-driven, intellectual curiosity. The company got started because crypto can be really difficult to manage for most people, for a variety of reasons. We really set out to make crypto more accessible to people. And originally that was focused on listing products in traditional markets, now it’s more focused on making advanced crypto trading functionality available in simpler, easier-to-use formats.
SM: Crypto has great appeal - it’s free from prejudice and judgment, it’s ruled by mathematics and algorithms, removing a lot of the human elements from finance - that’s also one of the reasons why I got into it. Can you tell us about the first time you actually ever received or sent any Bitcoin?
OS: Yeah! It would have been about 2013. As a concept, crypto was introduced to me through a class in university. I went to Stanford undergrad, we were looking at disruptive technology (a very Stanford thing to do!), and it was basically a class on: how do you think the world is going to break? And someone brought in crypto. I thought, “This is really interesting!” and started researching the space, shortly after that I bought my first Bitcoin. So it came from a place of intellectual curiosity. Interestingly, of that group of people, the person who brought crypto into that class was actually the same person that introduced me to my co-founder!
SM: So when you started with your co-founder, what was the big problem you were trying to solve?
OS: Accessibility. Our company really is all about “crypto made easy,” in whatever form that takes. So for people who don’t feel comfortable with crypto infrastructure, getting them access to the space. For people who *are* comfortable with crypto infrastructure, getting them access to advanced functionality without needing to get into all of the weeds, with regard to managing positions, and all of the technological infrastructure that comes along with that. So it’s always about making crypto as easy as possible.
SM: We received 400-something questions from our communities for this AMA, so I’ll start getting into those now. One of them is about the mechanics of the pricing of the tokens.
How are the price of tokens decided, both the initial listing price and the current market price?
OS: The initial price is basically just set, you can pick what it is. From there, you attribute to that value a certain amount of Bitcoin, or a certain amount of Ethereum depending on the project you’re looking at, on a notional basis. So, $10,000, multiplied by in this case 3, divided by the price of Bitcoin - is essentially how you start the process. What that $10,000 is, could be any number you want it to be, it will just affect the amount of Bitcoin that’s tied to it.
Once that starts, day over day the price is determined by a multiple of the change in price. If Bitcoin moves 5%, the token will move 15%. The percentage change in the BTC price, times your leverage level. It’s really quite that simple, and then it obviously compounds because the next day you’re starting out with whatever yesterday’s price was. That’s how the pricing mechanism works.
SM: A key part of the leverage tokens is the rebalancing.
Can you describe how the rebalancing works for leveraged tokens?
OS: I’d actually like to take one step back and talk about *why* these tokens need to rebalance. It’s really straightforward if you think about it conceptually. In the example we just talked about, the price of the tokens was moving, but the amount of Bitcoin associated with it wasn’t. The issue with that is, over time that will cause you to move away from having a 3x leverage level, because the amount of Bitcoin that you’re considering as attributable to that product now may not actually represent the full value - it’s not 3x the price anymore. And that causes issues where you’re no longer going to have the right leverage level. So the rebalancing essentially resets you to the leverage level such that you’re actually at 3x.
That’s really important because if you don’t do it and Bitcoin goes on a tear, your 3x leverage position is going to start eroding significantly, and you’re not going to get the exposure that you’re actually looking for. The way it works is: at a specific time, you’re looking at resetting that value so these two things are in line with each other. Now, one of the big issues that has come out of this is front-running - I think that’s been talked about a lot with the FTX tokens. Because you know what time that’s going to happen, therefore people can flip trades. One of the things that we built into our rebalance process is not only a smart order-routing system that actually looks at multiple exchanges across the industry, figuring out what the best price is currently, it also allows you to not have people front-run trades in the same way because they don’t necessarily know where they’re going to be executed. It would be impossible to tell how much is going to which exchange or which exchange it’s going to be executed on until after the fact.
That’s part of the benefits of the way our rebalancing structure works - the price we use to calculate those new Bitcoin levels is actually based on real exchange data, but it’s not integrated with our own proprietary exchange - that’s, for example, the way FTX works. Their trades always execute on FTX at a specific time. It makes it really easy to do things like put in a trade right beforehand.
SM: So it’s like a decentralized hedging mechanism that prevents the leveraged token holders from potentially being front-run by smart market operators that know when the rebalancing is going to occur.
OS: Exactly, so we look at a variety of different exchanges, and we look at what prevailing prices are, what the funding rates are, how much it’s going to cost to execute there, and find the best and cheapest way to do that.
SM: Investor protections! Being client-centric is usually the best long-term strategy and we really appreciate how you guys have taken that approach.
OS: Thank you! We worked pretty hard on it and it took quite a bit of design effort to make sure we were creating a hedging mechanism through our system called Jasper, to make sure that this was as robust as humanly possible.
SM: Next question is from myself, because I’m always interested in this. As we’ve seen the growth of stablecoins and these new types of leveraged tokens - tell us a little bit about the redemption and issuance of the leveraged tokens and how that works.
OS: The products can be minted and burned at request. So you log into our portal, and anyone can go through KYC, and anyone can actually act in making their own token. So you go in and it will give you a price, and you transfer stablecoin into the contract, the contract then does a bunch of stuff, executes all of these hedges, and sends you a newly made BTC3L or BTC3S token. There are a number of benefits to doing it that way, to allowing that open architecture. The reason it’s open in this way is that it actually promotes greater liquidity for the ecosystem and opens up a really interesting arbitrage opportunity for token holders. And not just designated market makers as token holders - anyone! Anyone can come in and mint or burn these tokens, that way you can control them yourself, or you can actually bring them onto an exchange and trade them. The logic for that is you can actually get some price discrepancies, so there’s a spread - most people who trade in crypto are probably aware of that, there are bid-ask spreads, you can capture some of that because we’ll give you the product at a mid-point. Or there can be trading anomalies or discrepancies between different markets, and it actually allows you to take a look and price-shop for the place where you can purchase these tokens for the least amount of money, and in doing so actually promote liquidity. It works in both directions, where you can actually create your own token, or you can destroy it.
SM: If you were holding a BTC3L token, and you wanted to capture your gains, should you redeem that token or should you sell it based on the order book? I guess the answer depends where you can get the best pricing? Is that an example of where there could be an arbitrage opportunity, where the order book prices are not as good as they should be so I could go directly and redeem it at the AMUN website?
OS: Exactly. So for example, if you’re looking to sell out of a position and you have a lower price on an exchange vs. on our platform, you could actually transfer it off of the exchange and burn the token yourself and get stablecoin back from that. The interesting thing there would be I would even take it a step further - that’s a situation where you might even want to look at doing that as a strategy, there’s a strategy there where if the purchase price is below the burn price on the platform, you’re actually incentivized to go out, buy it and burn it. That’s a market dynamic that we actually really want - it promotes better liquidity for the community, it promotes a more robust ecosystem, and the whole idea here is that you can actually *do* those kinds of things, and we would strongly encourage people to try that, and to see if they can find those opportunities. Those opportunities can actually be quite lucrative if you can identify them!
SM: Overall it helps to promote liquidity of the entire ecosystem as you say, and those spreads over time should get narrower.
OS: It encourages everyone to act essentially as a form of the market maker, where you can come in and actually make a market in some of these things, to help improve spreads, to help liquidity, and quite frankly to make money while you’re doing it!
SM: Here’s a really great question which we touched on earlier on the difference of the leveraged tokens vs. trading say on margin or a perp swap.
What’s the difference between BTC3L or BTC3S tokens, vs. trading on margin or with 3x leverage?
OS: There are a few differences, actually. The most obvious and important one is that you don’t have to manage margin - so you’re never in danger of a liquidation. That concept just doesn’t exist. We manage all of those elements and risks with a team that’s experienced in doing them - you just hold the final product and there’s no reason to worry about those types of events, which obviously can happen pretty frequently in crypto if you get a high volatility period. The nice part is, these are tokens that don’t require any maintenance from you to maintain those positions.
SM: You mean no initial margin, no maintenance margin, no margin calls.
OS: None of them. None of that exists structurally. You just hold it, and then we help you manage that margin as part of the product itself. That’s one of the big benefits of holding this way. You’re not exposed to those elements. These products also book your gains and losses each day and reinvest them. You’ll never be in a position where you’re in danger of liquidation on the downside, and you’ll never be in a position where you wanted to be 3x leveraged and getting gains, and your margin is growing because you’re getting paid, but your position as a whole is eroding because your level of leverage is decreasing. If you had $100 and you got paid $200, that $200 is not leveraged to the same level - so this helps you maintain consistent exposure to the leverage level you want.
SM: So if you wanted to maintain a 3x leverage level, the rebalancing helps you to maintain that as the underlying price goes up.
OS: Exactly, while making sure that you don’t have to deal with any of the actual management of margin or that you’re ever actually in danger of liquidation, on the price-moving-against-you side. So when the price is moving with you, it’s all about making sure you’re keeping that leverage level where you want it so you’re capturing all those increases, and on the downside, it’s protecting you from exposure to bankruptcy prices or having to deal with actually re-margining your position.
SM: My understanding is that these leveraged tokens are best traded on short-term with a hunch on direction - but it is not for HODLers?
OS: I think it’s really important to understand what these tokens actually do. I alluded to it earlier - you’re booking your daily gains and losses, which means that you’re exposed to the one day change in price. This isn’t the same thing as opening a margin position that runs forever with the same amount of Bitcoin I’m exposed to forever. The downside of doing that is what we just talked about - you’re in danger of liquidation if it goes too far one way, you’re not actually leveraging your full position if it goes well. But the reality of that is, it means you’re taking those one-day gains and losses. Can you hold these for longer? You can, but it’s something to be aware of - that those gains and losses are coming on a daily basis. That’s why we think about it in those terms. They’re very effective tools for traders if you’re going to hold them longer-term, you just need to be aware of the fact that you’re exposed to that *daily* price volatility, it’s not a long-term open-ended position. It could behave differently in your portfolio from what you intended if you’re not aware of that.
SM: Why did you choose USDC for minting and burning transactions on AMUN’s platform over other stablecoins?
OS: We actually allow both USDC and USDT. You can mint or burn tokens into USDC, especially for our BTC short product, a leveraged product minted in USDT, the reason for that is: that is the prevailing structure of the underlying asset industry. If you look at how you would hedge a futures position - most of those are going to be USDT-denominated and so for people to be able to see it on an apples-to-apples basis and actually be able to properly comparison-shop what they want to buy, we wanted to make sure it was consistent with other ways in which you might get leverage. To help people deal with those elements, and we’re continuing as well to roll out additional stablecoins over the next few months.
SM: Would it be dependent on the actual derivatives using the stablecoins as the funding currencies?
OS: Not necessarily tied together, we don’t have to do it that way. But one of the things in particular with the derivatives markets in crypto is that USDT isn’t necessarily a true peg, there’s not necessarily a way to redeem it for cash. One of the issues with that is in certain periods of volatility, it can trade away from that “bang-on a dollar” value. There is a conversion there, and that’s the thought process - it’s about how to best capture that for people that are looking to create in other types of stablecoins.
SM: I think we’re coming to the part that a lot of people are very interested in, because we’ve come across at Liquid several different types of stablecoin iterations, some of which you’ve mentioned, some which you haven’t, and I think it’s important in this universe of new products that are out there, to understand what’s different about the AMUN products. What are some of the differences and advantages specifically of the AMUN suite of products vs. some of the other leveraged tokens that are already out there trading?
OS: It’s a combination of a couple of things. There’s an element of decentralization, so we’re looking at a bunch of different exchanges instead of our own proprietary exchange. That means that you get the benefits of liquidity across a variety of different platforms, you get the benefits of best execution and what the best pricing is. You get the benefits of optimizations around funding rates, and that actually puts you in an overall much stronger position in terms of what we’re able to provide inside the “guts” of the product.
You also get the benefits of this rebalancing without the possibility of the front-running issues we’re talked about while maintaining that consistent leverage level. So some of the other products in the space don’t necessarily have that daily function. There are pro’s and con’s to that, you’re not taking those daily gains and losses which obviously affects what that return profile looks like, but it’s also really hard to enter a product and not know what leverage level you’re entering at. That’s part of it as well, maintaining that consistent leverage mark without necessarily being constrained to execution or hedging on a single exchange
SM: Currently one of the biggest issues in the industry is that of safety and security, so with AMUN tokens what do you do to ensure user safety and security?
OS: That’s a really good question. The AMUN tokens are developed and implemented by a team of highly skilled and experienced engineers, with a proven track record in financial engineering and in blockchain tech in particular. It was really important to have the right team behind it, additionally, the people who structure the financial part of this have backgrounds that are extremely robust in finance and in financial structuring. The smart contracts that lie in the center of the product have been certified by top-tier security audit companies, and are being periodically audited. Lastly, we store all of the assets that could be tied to this product in extremely secure ways using cold storage, using robust platforms that are able to safeguard from things that are not as pleasant that could occasionally happen in our industry. Those are the big things - we rely on the experience of our team and have built an infrastructure that was designed to take into account as many of the risks inherent in this industry as we possibly could.
SM: I’m assuming as part of the product development process, you’re able to do backtesting under different market conditions - is there an investor profile where using a leveraged token is better vs. trading on margin or a perpetual swap? Is there a certain type of asset class or trader that this will stand up under market conditions?
OS: I think the market conditions question is an interesting one, we’ve obviously gone and backtested a lot of this and what you can see is that it comes down to that “one-day” concept. So the difference between something like margin or perpetual swap is going to be, the type of person who would feel comfortable using those types of products or have all the accounts with those types of things set up, and be engaged at the level where they're actively handling their various obligations under those types of contracts - that's a very specific kind of profile and a specific kind of person, a specific kind of technical user. These products actually let you have a lot of those similar features but on spot markets. It's much more straightforward to use and it doesn't have any of those management requirements.
So for in terms of profile, this is really about easy to use. So this is an easier solution for people versus some of these derivative markets. In terms of market performance profile, you really see the benefit of this versus something like a perpetual or margin trading when the market’s moving in the direction that you think it is, because you're taking those daily gains and essentially reinvesting them and re-leveraging them, you're actually able to see some acceleration there.
The other thing that exists here is that you have what we call “threshold rebalances” - if you trip up to certain triggers, the product will automatically start a new rebalancing within a period, in an attempt to stop runaway losses, or what would be the equivalent of a liquidation - so essentially taking off some of that leverage if it's moving against you, which would actually slow down the rate of decay of your position. So if you're 3x leveraged at the beginning and something is going against you, you're gonna see that leverage number tick up as your margin erodes - that's structurally how a normal derivative market would work. In this case, that will start and then you're gonna hit certain thresholds that are gonna cause that levered level to be put back in line with that 3x so that you don't get that same runaway effect.
SM: That's very interesting. I'll just share that as running Liquid and seeing a lot of our margin traders, some of the problems, I really think this solves the issues. The problem that we see is that even when we present with our traders with pre-trade risk management tools, there's sort of this tendency to under-margin their trades, even with warnings they may not anticipate that the volatility in this market could lead to a margin call, and then liquidation. A lot of people get wiped out, and what I'm really liking about this product is that for people that are not as familiar with the mechanics and the margin requirements, this is a much safer product for them to express their views on the market without fear of unexpected outcomes.
OS: Exactly, that's the whole point. The bet you're making is the bet you're making, you're not exposed to necessarily these other elements. It's the bet you're making for that one-day period and then you're gonna take your gains and losses and then we'll do what we can to sort of help avoid some of that runaway on the downside. The idea here is that what you are trying to express, is what you are actually getting, as opposed to potentially having a position explode for some reason.
SM: Let's talk about what's next in your roadmap. Do you have any plans to introduce higher leverage tokens like 10x?
OS: [laughs] The short answer is, potentially. We're always looking to expand our product suite, both in terms of potentially building these products on other assets, so not just Bitcoin and ETH, and also potentially exploring other leverage levels. I imagine that's a somewhat unsatisfactory answer, we're not giving you a yes-or-no, but it really depends on demand from the community and what we see, and what we think can actually be managed safely. Which is the other question right, we don't want people to be in positions where something is behaving unexpectedly. Part of that is making sure that we can do that in a way that's safe and puts our users first. So the answer is it sort of depends.
SM: Makes sense. Are there any plans to implement elements of decentralized finance (DeFi) into your leverage tokens?
OS: So we've talked about that a bit, right. A good chunk of this infrastructure is somewhat decentralized and we're constantly pushing to add more, to allow the products to be more decentralized and reduce the amount of risk that you carry as a result of that centralization. Part of that is the smart order routing, part of that is this open burn function, and we're constantly looking to add more.
SM: One more question about the roadmap, when will an inverse token roll out for ETH?
OS: Right now we obviously do ETH3S, which is a 3x leverage short position, I think those questions may be alluding to a 1x, and that is something we will likely roll out at some point soon. Again it depends a lot on the interest of the community, so it's good to know that people are interested in it, and we're always open to suggestions like that, but I think this one, in particular, is fairly likely. Assuming you mean a 1x and not the 3x short which is already out on the market.
SM: Do you intend to list your tokens on any DEXs (decentralized exchanges)?
OS: Potentially, yes. Again, roadmap questions are always so hard because it really does depend. I think the idea here is that with this open burn function, you'd be able to promote that kind of liquidity, and that would be in keeping with continuing to decentralize some of the infrastructures. It's a question of demand and liquidity.
SM: That's a tough one because the time for execution, the liquidity that's required, the lack of certainty of execution price, I think it might be difficult. Speaking as the CEO of a centralized exchange [laughs].
The next question is: I tried to trade ETH3L on Liquid but the order books currently aren't very deep, which made it hard for me to trade there. Do you have plans to add more liquidity?
OS: Good question. The products are still premium, so we've sort of touched on this, there's this community-driven aspect of liquidity, where the ecosystem should promote it over time. The answer in the short term is also yes, we work with our market makers to provide as much liquidity as we can to the markets ourselves, and through these third parties. But a piece of this is also, the ecosystem is still fairly new and is growing, and that liquidity mechanism should ensure that those order books build out organically in a very nice way.
SM: Many projects within the industry have policies for their ambassadors to contribute to the community to help attract recognition for the project. Does the AMUN team have any plans to create such an ambassador program?
OS: I don't think we have any short-term plans to do something like that. For the time being, I think we're still focused on growing the community organically and helping people actually really understand our products, a big part of what we do is around education, so I think that's really where the focus lies for the time being. But I think a program like that is certainly something we would consider setting up in the future.
SM: And finally, no AMA would be complete without a random type of question from the community: Right now would you buy BTC3S or BTC3L and why? [laughs]
OS: [laughs] You’re essentially asking me if I’m leveraged long or leveraged short as a market view - I think the pricing today is probably around $9200 and change I’m probably long today given what market performance has been, so it's maybe an unsatisfactory answer but I'm also sort of long-term “long Bitcoin” anyway, so I may be a little bit biased there.
SM: Great! Well, thank you Ophelia so much for helping to explain to the community about the leveraged tokens, we're really excited to be partnering with you on this and I think it's part of our strategy to create a more transparent and user-friendly platform. We couldn't be happier to have these tokens trading on Liquid, and looking forward to a great ability for people to express their views on the market.
OS: Yeah! I'm really excited, this has been really fun.
SM: Great so next time you have some interesting products that you want to tell the trading community about, we'd be more than happy to have you back and tell the story.