Risk

Leveraged Token

Mooncake’s leveraged token is a trading instrument designed to maintain a target leverage ratio. It is suitable for short-term trending markets and not intended for long-term holding. Please exercise caution when choosing to hold leveraged tokens for extended periods.

1. Volatility Drag Risk:

   In a choppy market, continuous rebalancing may cause the leveraged token’s price to decline even if the underlying asset’s price remains unchanged. Over prolonged periods of volatility, the volatility drag effect can make the leveraged token’s value appear to approach zero.

2. Price Risk:

   Although there is no liquidation mechanism, the leveraged token’s price fluctuates more significantly than the underlying asset due to its leveraged exposure.

3. Insufficient Effective Leveraged Position in Vaults:

   In rising markets with limited LP liquidity, the leveraged vault may face a shortage of leveraged positions after rebalancing. This can cause the effective leverage to remain below the target leverage level.

4. Liquidity Risk:

   If the LP pool size is too small, the leveraged positions may not be fully convertible into the underlying token, potentially leading to redemption failures.

5. Oracle Risk:

   The leveraged token price relies on oracle feeds. Incorrect or manipulated oracle prices may result in unexpected losses.

6. Smart Contract Risk:

   As Mooncake is an on-chain protocol, it inevitably faces various smart contract risks. In the event of an exploit, the loss could be permanent and irrecoverable.

Funding Token

1. Yield Risk:

   The APY of Funding Tokens is derived from leveraged positions and tied to the Funding Curve. When utilization is low, the yield of Funding Tokens decreases accordingly.

2. Principal Loss Risk:

   Although Funding Tokens continuously earn funding fees from leveraged positions, they are not principal-protected. If the LP pool lacks sufficient liquidity and the underlying asset’s price falls, the funding token vault’s leveraged exposure may increase beyond 0%, resulting in potential losses tied to the underlying token’s price movements.

3. Liquidity Risk:

   If the LP pool size is too small, the funding positions may not be fully convertible into the underlying token, potentially leading to redemption failures.

4. Oracle Risk:

   Inaccurate or manipulated oracle prices could allow leveraged tokens to profit unfairly, which in turn may cause principal loss in Funding Token positions.

5. Smart Contract Risk:

   As Mooncake operates fully on-chain, it is subject to smart contract vulnerabilities. A protocol exploit may cause irreversible fund loss.

LP Token

1. Impermanent Loss:

   As an LP, you effectively hold a mix of leveraged and funding positions. When traders buy these tokens and the market moves in their favor, LPs face the risk of impermanent loss.

2. Liquidity Risk:

   During withdrawal, if the remaining leveraged or funding positions in the pool are insufficient to convert all redeemed positions into the underlying token, LPs may encounter liquidity risk. Although LPs can use the force withdraw feature to request redemption, which will convert all positions into the underlying token at the next rebalance event.

3. Smart Contract Risk:

   If the liquidity pool or staking contracts are exploited, attacked, or maliciously manipulated, LPs may incur partial or total fund loss.