LP Risk Management

LP Risk Management

• Funding Fees: RFX markets utilise funding fees and price impact to minimise the LPs directional exposure and ensure delta-neutrality. This is in addition to the borrow fees used by traditional derivatives DEXs. This reduces directional exposure and enhances LP stability, by incentivizing funding-fee-seeking arbitragers to balance open interest (OI) at 50:50. Similar to the CEX model, whenever an asset trades at a premium or discount to the index price, funding fees force longs to pay shorts or vice versa to balance out OI.

• Algorithmic Pool Protection: Partial/full liquidation of positions in cases when traders’ unrealized profits exceed the market's configured threshold. This mechanism significantly reduces probability of LPs to accrue bad debt, markets are always solvent and all profits at the time of closing can be fully paid.

• OI Caps: Markets are also subject to long and short-side open interest caps to maintain balanced open interest, prevent excessive skewness, and limit LP exposure during times of high volatility. OI Caps are determined based on empirical analysis of historical data.

• RFX Insurance Fund: 10% of all fees generated are diverted to a separate smart contract. The Insurance Fund is designed to provide an additional layer of protection for users in case of unforeseen events such as failure in liquidation and resulting bad debt.

• LP Insurance: LPs on RFX will be able to opt-in to an additional layer of protection by way of third-party insurance, available on request.