Risk Management
Market-Centric Mitigation Tactics
Mitigating Insider and Market Manipulation Risks
Our approach identifies and counters risks inherent in markets with smaller capitalizations and limited liquidity, crucial for protecting liquidity providers from insider advantages and manipulative practices.
Strategic Risk Controls:
Limiting Open Interest and Leverage: Imposing caps on open interest and leveraging based on market risk profiles to prevent undue market influence.
Elevated Trading Fees: Adjusting fee structures in higher-risk markets to disincentivize potential exploitative trading.
Funding Factor Adjustments: Modifying the funding rate to balance the disproportionate influence of trades based on insider information.
Adaptive Liquidation Thresholds: Setting market-specific liquidation parameters to safeguard against volatile price movements in less liquid markets.
Emergency Trading Restrictions: Implementing reduce-only or limit-only modes during critical scenarios to maintain market integrity.
Liquidity Pool Protections
Dynamic Interaction Costs:
Deposit and Withdrawal Fee Adjustments: Instituting a dynamic fee model for deposits and withdrawals to prevent arbitrage and ensure equitable value distribution among liquidity providers.
Maximum Drawdown Parameters: Defining loss thresholds to manage the impact of significant profit takings, preserving pool stability over time.
Buffer Mechanism for Enhanced Fairness: Establishing a buffer to moderate the immediate effects of trading losses and gains, ensuring a balanced distribution of resources among pool participants.
Integrated Formulae for Financial Stability
Pool Deposit Cost (PDC) Equation: Provides a calculated measure to adjust deposit costs dynamically, ensuring fair participation in the liquidity pool.
Pool Withdrawal Cost (PWC) Equation: Balances withdrawal costs to maintain the integrity of the liquidity pool against market fluctuations.
Setting Maximum Drawdown Limits
Asset-Specific Drawdown Caps: Each pool asset has a designated maximum drawdown, expressed as a percentage of the pool's total balance. This serves as a gauge for the pool's net loss over time, factoring in a time-weighted consideration of drawdown events.
Real-Time Calculation and Amortization: The drawdown figure is dynamically calculated and adjusted every hour by 4.16%, ensuring that the effects of significant profit withdrawals by traders are mitigated within a 24-hour window.
Example Scenario: Should a trader aim to withdraw an unrealized gain of $1M from a pool that has a preset maximum permissible loss (PPL) limit of $500K, they would be required to stagger their withdrawals, thereby minimizing the overall impact on the pool's stability.
Purpose and Standard Setting: Primarily designed to counteract the potential for information asymmetry and insider trading, the typical maximum drawdown setting hovers around 12% for each pool.
Implementing a Pool Buffer System
Dual Trading and Liquidity Provision: Recognizing the inherent risk when users engage in both trading and liquidity provision—potentially exploiting the system to offset trading losses—a buffer system is instituted.
Operational Mechanics: Losses incurred by traders are initially directed to a buffer, which then proportionally redistributes these funds to the pool at a regulated pace, set at a full redistribution rate within approximately 30 minutes.
Winning Trades and Buffer Utilization: Gains achieved by traders are initially satisfied from the buffer, with any excess required amounts being drawn from the pool to ensure equitable distribution among all participants.
User-Centric Risk Management
Challenges with Direct User-Based Mitigation: Given the open-access nature of DeFi platforms like HTZ, where users can effortlessly generate new wallets, direct user-centric risk mitigation strategies offer limited efficacy.
Mitigative Measures for Active Positions: Nonetheless, HTZ enforces certain risk containment protocols for users holding open positions, specifically aimed at curtailing gains that may stem from inaccuracies in price data, thereby upholding the integrity of trading activities within the ecosystem.
Last updated