Risk Management
The backbone of Syndr is our risk engine. Post initial validation, all incoming orders, block-trades, withdrawals first get sent directly to the risk engine before any further processing.
Risk management system of Syndr covers roughly the following major components -
- Margin engine
- Liquidation engine
- Insurance fund
- Onchain Custody using onchain smart contracts
Liquidations
Our liquidation an automated mechanism to handle all the risky positions on the platform to reach a healthy margin state and/or a delta-neutral portfolio. During liquidation process, liquidation engine can restrict user access, closing open orders/positions, and even open new positions to hedge risk. Liquidation engine can close at-risk account positions using the LP pool liquidity or the orderbook liquidity.
-
Initial Margin - The amount of margin reserved to open a position.
-
Maintenance Margin - The amount of margin reserved to keep a position open. This is lower than the initial margin required.
-
Liquidation Price: At Liquidation Price, the difference of position margins and Unrealized PnL is equal to the Maintenance Margin.
-
Bankruptcy Price: At Bankruptcy Price, the Unrealized Loss of a position equal to the Position Margin.
Liquidation Process
Cross margined accounts go into liquidation when Maintenance Margin Utilization (MM) exceeds 100%. At this point, the trader does not have sufficient collateral to meet the maintenance margin requirement of open positions.
Step 1
During liquidation process, user's access to the account is restricted with control taken over by the liquidation engine. New positions cannot be entered or closed by the user. The account’s all open orders are cancelled. This may or may not free up some margin blocked for this account.
Step 2
The liquidation engine performs incremental liquidation of short positions in the system using liquidity in both the orderbook as well any available quotes from the LP pools.
The system will usually try and first liquidate future positions and only after that - options positions. There are circumstances, in which options positions would get liquidated first, however, only when options' deltas are bigger and opposite of all the other deltas on the platform.
Liquidation engine tries to place limit orders/LP-pool trades, to reduce the position, every few seconds, upto a fixed duration. Please note that in case the Liquidation Size turns our to be equal to the position size, then the entire position will be liquidated.
Every matched quantity is charged a liquidation fee.
Step 3
If the position cannot be liquidated with both the orderbook/LP pools, the liquidation engine will perform a trade with the insurance fund at a markup. This essentially results in the Liquidation Engine taking over the remaining position via the insurance pool.
The goal of the Liquidation Engine is to close positions it acquires at price which is equal to or better than the acquisition price. To this end, as soon as the Liquidation Engine takes over a position, it places a limit order to close the position. Generally, the price of this limit order will be away from the current Mark Price at which Liquidation Engine has acquired the position. Generally, this limit price would be away from Mark Price and would provide an opportunity to traders an attractive entry point. However, if the Mark Price breaches the limit price, then the Liquidation Engine cancels the limit order and triggers auto-deleveraging.
The liquidation fee is also charged on this trade.
Step 4
In the event that there is not enough collateral to pay the long option positions on settlement, the insurance fund pays out the difference using its own funds.
Step 5
If there is a scenario where the insurance fund is not sufficient to payout the long option positions on settlement, the exchange has to conduct an auto-deleveraging of the most profitable traders. Existing long positions are closed at the mark price.
Liquidations for portfolio margin accounts
When liquidating a portfolio margin account, liquidation engine will try to reduce the margin requirement using a combination of reducing the portfolio delta and scaling down open positions. Scaling down process works similarly to the standard cross-margin account.
- All open orders in portfolio margined contracts are cancelled
- Margin requirement for the portfolio is recomputed after assuming that the delta risk of the portfolio has been completely hedged by taking appropriate position in the perpetual contract underlying
- We compute the percentage reduction in the sizes of all positions in the hypothetical delta hedged portfolio
Margin requirement reduction through delta hedging
Theoretically, a portfolio could be delta hedged by trading either futures or options contracts. However, since liquidity in futures is typically greater than in options, only futures are traded to make the portfolio delta neutral.
Liquidation engine will try to open a position in the underlying's perpetual market using either the orderbook or the perpetual LP pool.
Insurance Fund and OI Caps
Syndr will maintain an on-chain insurance fund for covering bankruptices. Insurnace fund will be seeded at launch will continue to grow over time funded by platform fees.
OI caps
The maximum OI for all markets will be capped as a function of the size of Syndr's insurance fund.
If the insurance fund gets depleted, any other occurring bankruptcies will be socialized among the winning traders. However, it is our goal to never experience any socialized losses. Therefore, if at risk of socialized losses, margin requirements will be made more strict as soon as more bankruptcies occur.
Custody of User funds
Syndr is a non-custodial exchange and does not take custody of any user funds.
- All user fund deposits remain in the custody of on-chain smart contracts
- Non-custodial access: User is always in complete control of their assets.
- Withdrawals from the exchange can only be done by the account owner via an onchain transaction.
- All withdrawals must first clear the risk engine to account for the current state of user's portfolio.