⚖️Tranches

Professional risk management for LPʻs

Several risk management have been implemented on the platform to safeguard liquidity providers who serve as counterparties to traders. Inspired by Level Finance's Risk Management & LP Seniority (RMLP) system, we adapt a credit structure to provide multiple levels of risk for liquidity pools.

By utilizing Tranches, the risk exposure to the underlying assets can be partitioned, allowing higher-risk assets to be allocated to dedicated pools. This approach effectively addresses inherent functional challenges found in zero-price impact perpetuals, such as long-tail risk, by isolating the risk exposure specifically on liquidity providers who possess a greater tolerance for risk.

The percentage gains and losses for each asset class in the three tranches are shown below. The Junior tranche bears the highest risk in the event of unexpected shortages due to adverse market conditions or other events. To mitigate the increased risk compared to the Senior and Mezzanine tranches, Junior Tranche will receive the highest platform revenue allocation and therefore the highest APR. In contrast, Senior Tranche took the least amount of risk, but also received the least share of the platform's profits.

In the case of opening a position of 100 ETH, the pool will be allocated as follows:

  • Senior Pool: 100 x 20% = 20 ETH

  • Mezzanine Pool: 100 x 35% = 35 ETH

  • Junior Pool: 100 x 45% = 45 ETH

Trade constraints are particularly relevant when trying to establish a new position. If the position a trader wants to create would cause the Longs vs Shorts ratio for an asset to exceed its Limit Ratio, the position will not be permitted to open. Furthermore, the trader cannot open a short position with a Position Size greater than the Maximum Value allowed.

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