Risks

There is Always Risk.

There is risk inherent in any activity. Here, we attempt to describe the material risks involved with UTY and the ecosystem, but regardless of how much we disclose, we want to make the following clear: there is risk. For unforeseen reasons, despite the best efforts of a team, bad things can happen. Nobody can control all variables in a system. Size positions appropriately. Think about your personal financial situation. Don’t over-expose yourself to any risk.

Most importantly, if someone ever tries to tell you there is no risk, run away screaming. If you learn nothing else from this page, please remember that.

Material Risks

Based on an evaluation of similar products and the best judgment of the teams, we believe the risks in this section to be the main material risks associated with UTY. This is not an exhaustive list of all risks! However, this is at least a list of some major risks that have or conceivably could materialize for products similar to UTY with at least some degree of probability (rather than an infinitely long list of all risks, no matter how vanishingly small the probability).

Funding Risk

Funding Risk arises from Unity’s reliance on perpetual futures contracts to hedge the price risk of its backing assets. Normally, the funding rate on perpetual contracts is positive, meaning that being short a futures contract as a hedge to the price risk of the underlying assets generates revenue. However, this does not have to be true at all times, and funding rates have been negative in the past. When this happens, it is possible if the positions are not able to be exited in a timely fashion and underlying assets converted into stable dollar assets, the overall project could incur losses.

Historically, funding rates often revert to a positive mean. Negative periods happen but tend not to persist. Yet there can be no guarantee offered that this will always be the case going forward.

Historical data before Unity’s launch doesn’t fully capture Unity’s market impact. As we gather new data, we will revise this section to reflect up-to-date funding rate behavior if Unity itself appears to be having a material impact on funding rates in the market.

Liquidation Risk

XSY uses assets to back short perpetual futures positions. Because the protocol sometimes holds a different asset than the one underlying its derivative, exchanges operating on a “no loss” principle may forcibly close positions when there is a significant value mismatch. This event—known as liquidation—occurs if a position lacks sufficient collateral to meet margin requirements. In the case of XSY, this should only occur if the underlying asset held by XSY is going up in price faster than XSY can manage its exposure.

Liquidation doesn’t mean a total loss of collateral. Rather, the exchange begins closing the position in increments to reduce risk. Because XSY uses minimal leverage, the likelihood of this scenario is low. Nonetheless, in a very large and very quick move, it is possible that XSY could face liquidation risk, which could lead to protocol losses, especially if the asset also falls back down in price rapidly as opposed to remaining elevated after the liquidation and hedges were not able to be replaced in timely fashion.

Custodial Risk

When XSY utilizes Off-Exchange Settlement (OES) providers to hold protocol backing assets, it is subject to risks associated with the custodian’s operational capabilities. While OES solutions are designed to enhance asset security compared to centralized exchanges, they still introduce potential dependencies and risks.

Accessibility & Availability

When applicable, XSY depends on its OES partners to deposit, withdraw, and delegate assets to and from exchanges. If these services are delayed or disrupted, it could temporarily affect minting and redeeming UTY, and could impact hedging speed and execution.

Performance of Operational Duties

In case an exchange faces issues, XSY relies on the custodian to transfer unrealized PnL from that exchange in a timely manner. To limit exposure, XSY regularly settles PnL (for instance, Copper’s Clearloop does this daily), ensuring large balances are seldom at risk. However, in times of heightened volatility or instability, risks could be exacerbated.

Operational Failure of Custodian

Although large-scale crypto custodians have generally avoided major operational failures or insolvencies, this possibility cannot be dismissed. XSY’s backing assets are held in segregated, bankruptcy-remote accounts, meaning the custodian—or its creditors—should have no legal claim on these assets. If an OES provider did fail, the main impact would be slowed creation or redemption of UTY while XSY transfers assets to an alternative custodian, and possible other operational disruptions. In extreme circumstances, there could be legal or regulatory risks related to an unwind.

Exchange Failure Risk

XSY uses perpetual futures contracts on centralized exchanges (for example, Binance) to offset the price risk of its backing assets. If an exchange suddenly fails (as happened with FTX) or has technical problems leading to trading disruptions, XSY must manage the fallout.

Where OES providers are used, no backing assets ever leave XSY’s custodians as collateral for an exchange trade. They remain with Off-Exchange Settlement (OES) providers and are never deposited directly on any exchange. XSY’s only exposure is the unrealized profit or loss (PnL) between OES settlement cycles.

However, an exchange failure would necessitate re-allocating hedges, XSY may have some loss of PnL due to slippage of unsettled unrealized PnL, and could be disruptive to the overall market.

In instances where OES providers are not utilized any assets held directly at a centralized exchange are at risk.

Collateral Risk

XSY employs perpetual futures which require margin in the form an exchange will accept. In many cases, futures are quoted in USDT, so margin and PnL calculations are also in USDT. This setup makes XSY “long USDT” by default. Therefore, XSY could be exposed to issues with the underlying collateral used for trades, and thus would be exposed to the risk of USDT.

Hack / Exploit Risk

While XSY endeavors to build to the highest standard, nothing is guaranteed to be 100% secure. Hacks and technical failures have occurred in the crypto space, and the XSY team cannot guarantee with certainty that any use of a novel technology will be completely safe. Therefore, we must disclose that the traditional problems with crypto protocols: private key exploits, bugs in code leading to exploits, etc. are all possible risks that should be considered before interacting with the project.

Ecosystem Risk

XSY is an onchain project, and thus dependent upon those ecosystems operating properly. While XSY does not control those risks directly, a material disruption in the operation of a chain, the ability to move funds, the effectiveness and sustainability of the ecosystem, and more all impact the operation of XSY in the same way that having viable infrastructure effects the prospects of a project operating in physical space in a specific geographic region. To that end, XSY does inherit these risks and anyone interacting with or using the protocol should be aware of them.

Not Comprehensive

As stated at the top, the XSY team wants to reiterate that this is not an exhaustive list of all possible risks that can be faced. All activities are risky, be they investments or simply a decision to get in a car and drive to the store to buy groceries. We are not experts in your personal, specific situation. We are not fully aware of all facts that apply to you. Meet with advisors. Talk to experts. Make informed decisions. It is functionally not possible to disclose all risks, though the team has endeavored to highlight material and key risks to the best of our abilities.

Again, we are not your personal advisors, nor can we be. Please be smart, be safe, and make your own determinations on risk.