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How to use Nami Insurance at the time of Token Unlock

By Vinh Tien 07/12/2023
How to use Nami Insurance at the time of Token Unlock

The meaning behind token unlocks

Token unlocks are when projects distribute a certain number of tokens into the market after a fixed period of time. After fundraising and token issuance, projects do not release all tokens immediately, but spread it out over various stages to avoid price shocks when newly listing.

Imagine an investment fund putting $100 million into a Layer 2 project at $0.02 in private sale. After the Layer 2 lists, the token trades at $2.

=> In theory, the fund has 100x their initial investment and holds $10 billion worth of tokens. If all were sold, the Layer-2 would certainly collapse.

How do token unlocks impact price?

Downward pressure: Investors are likely to sell immediately when receiving tokens since unlock price is usually higher than private sale prices, this creates sell pressure.

Inflation: Token unlocks increase current supply. As we know from economics, when supply rises without corresponding demand, prices adjust downward to find equilibrium. Continued supply increases without demand causes failures

Terra Luna exemplifies this, LUNA supply kept increasing due to UST burning/minting until investor confidence finally broke and the price crashed from $116 to $0.00001 in under a month.

Continuous supply increases caused the LUNA price to drop near 0

Do prices always drop at unlocks?

Many hold the view that prices will certainly fall at unlocks and short the token.

=> This perspective is extremely mistaken as many factors determine if prices rise or fall sharply.

For example, Optimism had a scheduled unlock of 24.16 million tokens around September 30, 2023 worth roughly $30 million. Many predicted OP's price would plummet.

OP had 24.16 million tokens unlocked on 30/9/2023

However, OP increased by nearly 10% over 3 days after the unlock event despite inflated supply.

OP still surged strongly, despite the token unlock event

Influencing factors on post-unlock prices:

  • Amount of tokens unlocked
  • Unlock schedule
  • Token recipients
  • Macro market conditions

How to use Nami Insurance for unlocks

If you've assessed the above factors, Nami Insurance can be used in these cases:

Expecting a decrease: Open a “Bear contract” to hedge. If prices fall, paybacks compensate for losses. If market recovers, you also profit from price appreciation.

Expecting an increase: Open a “Bull contract” to optimize gains from paybacks and holding.

Unsure: Open a contract opposite your futures trade. If the market moves against you, insurance will cover some losses.

  • “Bear contract” to hedge a “Long position”
  • “Bull contract” to hedge a “Short position”

About Nami Insurance

Hedging Protocol shielding Futures/Spot traders from liquidation risks across CEXs and DEXs.

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