Deri Protocol’s Open Interest Limit Update: A Shift Towards Dynamic Risk Management

Introduction

We have recently implemented an update to Deri Protocol’s open interest limit mechanism. This change replaces the previous hard limit with a more flexible and dynamic approach, aiming to enhance capital efficiency while maintaining the platform’s security.

Understanding Open Interest

The Open Interest of a symbol is the total number of outstanding contracts currently held on that symbol. It serves as an indicator of market activity and liquidity. However, excessive open interest can pose risks to the stability of a trading platform, particularly in the decentralized finance (DeFi) space.

The Previous Hard Limit

Deri Protocol’s initial approach to managing open interest involved a hard limit determined by the protocol’s risk management measure. This meant that once the total open interest reached the predetermined threshold, no new positions could be opened. While this provided a straightforward way to control risk, it also limited the platform’s capacity to accommodate growing demand. More importantly, when this hard limit is reached for some symbol, users cannot even trade to decrease the net position of it.

The New Algorithm: Open Interest Multiplier

The recent update introduces a new algorithm that replaces the hard limit with a more nuanced approach. First, we define a (soft) bound of Open Interest as one half of the Open Interest Hard Limit that was defined in the previous mechanism. And then we calculate Open Interest Multiplier (OIM) as follows:

With the new risk management measure, the initial margin requirement becomes the previous value multiplied with OIM. That is, when the Open Interest of a symbol surpasses its Open Interest Bound, OIM becomes greater than 1 and subsequently the protocol starts to increase the initial margin requirement. That is,

Please note that OIM does not affect maintenance margin requirement and thus does not impact the mechanism of liquidation.

Additional to the adjustment of initial margin requirement, we still implement the following two “hard limits” on OIM, and hence on the open interest:

• When OIM > 4, only trades decreasing Total Net Position can be placed.
• When OIM > 8, no trades can be placed any more.

That is, the overall hard limit of OIM is 8, while the hard limit of OIM for increase-net-position trades is 4. In other words, the range [4, 8] of OIM is reserved for trades decreasing net positions. With such a setting, trade decreasing net positions can always be placed and executed.

Implications for Traders

The update to the open interest limit mechanism is expected to have a positive impact on traders using Deri Protocol.

• With the new mechanism, traders can open more trades. However, starting from the Open Interest Bound (equal to one half of the previous Open Interest Hard Limit), traders need to post more collateral (i.e. Open Interest Multiplier starting to become greater than 1).
• Unlike in the old mechanism, now the trades that reduce the net position will always go through.

Conclusion

Deri Protocol’s shift from a hard open interest limit to a dynamic algorithm based on the Open Interest Multiplier represents one step forward in capital efficiency and risk management. This update aligns with the protocol’s commitment to innovation and providing a robust trading environment for its users. As the DeFi space continues to evolve, such advancements in risk management are essential for ensuring the long-term sustainability and success of decentralized platforms.