Risk Mitigation
Supporting a wide array of markets to trade comes with its risks.
Markets, in particular those with small caps and less liquidity, are prone to insider advantage, price manipulation, and other hazards that can be detrimental to liquidity providers. Pingu takes a Risk-Based Approach (RBA) at several levels to preserve a fair trading environment for all participants.
Market-Based
A market's risk increases if:
it is thinly traded (illiquid);
has a smaller market cap;
has a token or share supply controlled by just a few whales; and/or
has consistently high volatility.
Since Pingu's liquidity vault is shared across all markets, it is paramount to limit risk on a per-market basis to prevent contagion. Market risk mitigation measures are listed below.
Maximum Open Interest
Once current open interest exceeds this value, orders are no longer accepted on this market.
This setting is lower for higher risk markets.
Maximum Leverage
Users trading with an information or insider advantage should provide more real collateral (margin) when placing trades, increasing their risk.
This setting is lower for higher risk markets.
Fee
Users trading with an information or insider advantage should pay more to trade, tempering improper profits over time.
This setting is higher for higher risk markets.
Funding Factor (FF)
The FF is the yearly rate at which longs (or shorts) pay shorts (or longs) if open interest were completely skewed toward longs (or shorts).
Users trading with an information or insider advantage will skew open interest toward their directional bias. Therefore, this setting is higher for higher risk markets.
Liquidation Threshold
A position can be liquidated once its loss reaches this threshold, set on a per-market basis. For less liquid and more volatile markets, positions have to be liquidated before reaching maximum loss (equal to their collateral value) due to rapid price changes.
Therefore, this setting is lower for higher risk markets.
Reduce-Only or Limit-Only Mode
In extreme scenarios involving data errors or exploits, markets can be set to accept only reduce-only or limit orders.
Vault-Based
Pingu liquidity vaults also come with their own set of risk mitigation measures.
Dynamic Deposit/Withdraw Costs
Liquidity providers who want to deposit or withdraw from the vault will pay a tax if the vault stability fund and total trader unrealized profit or losses are in their favor. This is to maintain expected value neutrality and prevent liquidity sniping, like depositing right before a large trader loss occurs to scoop up the loss.
A Vault Deposit Cost (VDC) applies if total trader unrealized P/L minus the balance is < 0. Given an Amount to deposit:
Similarly, a Vault Withdrawal Cost (PWC) applies if total trader unrealized P/L minus the stability fund balance is > 0. Given an Amount to withdraw:
Stability Funds
Since anyone can trade and anyone can participate in the vaults, a risk arises where a user can both make trades and provide liquidity to get back some of their trading losses.
For example, a user can simultaneously open large long and short positions on a given market (using different wallets). The user can later close their winning position, taking a profit, then deposit in the vault and close their losing position, redeeming some of their losses.
To mitigate this risk scenario, Pingu vaults have a stability fund.
When a trader makes a loss, it is sent to the stability fund which then streams it to the vault at an adjustable rate, currently 100% in around 30 minutes. The stability fund stream is sent in equal share to all vault participants.
When a trader makes a win, it is first paid from the stability fund, then from the vault if the stability fund is not enough to cover it.
Maximum Delta
When long and short open interest become too imbalanced, the protocol becomes exposed to directional risk. Maximum Delta limits how far open interest can drift toward one side (long or short) before new positions on that side are rejected.
Because low-liquidity or highly volatile markets are more vulnerable to directional manipulation, Maximum Delta is lower for higher-risk markets. This ensures that the protocol never becomes excessively skewed and remains solvent even when trader behavior becomes one-sided.
Maximum Size
Maximum Size caps the largest position a single user can hold on a specific market. It is defined as a fraction of the market’s maximum open interest. The goal is to prevent a single participant from concentrating too much exposure, especially in markets where price feeds can move sharply or liquidity is thin.
Auto-Deleveraging (ADL)
ADL is a safety mechanism that reduces the size of profitable positions when the liquidity vault experiences excessive drawdown.
When market conditions become extremely imbalanced (typically following volatility spikes or thin-liquidity events) vault losses may exceed acceptable thresholds. ADL steps in as a last-resort measure to restore solvency by reducing exposure from traders whose positions are deeply in profit.
ADL is rarely triggered in normal conditions, but it guarantees that catastrophic outcomes remain structurally impossible.
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