Risk Management
Dynamic Pricing Mechanism:
Buffer employs a "Dynamic Pricing" mechanism to incentivize or penalize traders, with the aim of maintaining balance in the Open Interest (OI) across various markets and promoting diversification among traders. This mechanism is intricately designed to impose higher fees during periods of market volatility. The fee is applicable to all trades and dynamically scales, influenced by trading volume, and payouts. It adds positive expectancy to the platform, thereby improving the possible outcome for LPs.
Pool Specifications:
Additional parameters besides the adaptive pricing mechanism implemented to manage risk associated with long tails events for liquidity providers:
Max Utilization %
This parameter defines the maximum cumulative trade sizes that can be placed across all markets simultaneously. It sets an upper limit on the total exposure across all markets. 40% of the available Liquidity. Buffer reserves the liquidity in BLP to be paid as profits to traders. There is a maximum utilization for BLP, beyond which new positions are not allowed to be opened (traders are still allowed to reduce their OIs). This parameter is in place to ensure some liquidity is always available for LPs to withdraw.
Max Utilization per asset %
2-3% of the available liquidity Percentage of the total available liquidity (depending on the asset)
Max Utilization per trade %
0.25% of the available liquidity
Max Deposit Limit
The maximum amount of liquidity that can be provided to the uBLP and aBLP vault at any given time.
Circuit Breakers:
To further protect LPs from potential risks, Buffer implements an on-chain liquidity circuit breaker. This ensures that a minimum percent of pool's NAV is available as liquid to trade options.
When the threshold cut-off (Net Liquidity Out) e.g. 0.5% of the liquidity for uBLP is reached on any of the pools, the circuit breaker fires. The circuit breaker continues to fire until these conditions are rectified. A cooldown timer then begins, during which no new trades can be placed on the platform.
When the circuit breaker fires, trades that are already open on the platform are not affected and will continue to be executed as usual.