What are liquidity tiers?

As part of the default settings of the v4 open source software (”dYdX Chain”), liquidity tiers group markets of similar size and liquidity into standardized risk parameters. Liquidity tiers specify the margin requirements needed for each market and should be determined based on the depth of the relative market’s spot book as well as the token’s market capitalization. For example, BTC and ETH are the only credible Large-Cap as of September 2023.

What are current liquidity tiers?

Current Liquidity Tiers are set forth in here:

Liquidity Tiers

Understanding Tier Parameters

Initial Margin Fraction: Margin fraction is calculated as a trader’s position notional value divided by equity. If a trader’s margin fraction exceeds the initial margin fraction, a trader will no longer be allowed to increase their position.
- Each market has a Lower Cap and Upper Cap denominated in USDC.
- Each market already has a Base IMF.
- At any point in time, for each market:
  - Define
    Open Notional = Open Interest * Oracle Price
    Scaling Factor = (Open Notional - Lower Cap) / (Upper Cap - Lower Cap)
    IMF Increase = Scaling Factor * (1 - Base IMF)
  - Then a market’s Effective IMF = Min(Base IMF + Max(IMF Increase, 0), 1.0)
- The effective IMF is the base IMF while the Open Notional < Lower Cap, and increases linearly until Open Notional = Upper Cap, at which point the IMF stays at 1.0 (requiring 1:1 collateral for trading)
Maintenance Margin Fraction: Margin fraction is calculated as a trader’s position notional value divided by equity. If a trader’s margin fraction exceeds the maintenance margin fraction, their position will be automatically closed (liquidated) and a liquidation fee of at least 1% will be assessed (may be higher depending on liquidity at the time of liquidation).
Impact Notional: The impact notional represents the depth to which each side of the order book is examined to determine the mark price.

What is the safety tier?

If a market is experiencing idiosyncratic issues, risk parameters can be adjusted separately from its liquidity tier designation. Because risk parameters can be adjusted independently, traders can be protected from unexpected market movements. In the safety tier, the initial margin fraction is increased to 1 or 100%. This means that traders are required to provide the full notional value of their positions are collateral, which reduces the risk of traders being liquidated due to adverse price movements.

How are liquidity tiers determined?

The applicable governance community has the ability to create and modify liquidity tiers as well as update existing markets’ liquidity tier placements.

Disclaimer and Terms

This document may provide information with respect to the dYdX Chain software, and/or non-mandatory guidelines and suggestions that may help with using dYdX Chain software. dYdX Operations Services Ltd. does not run dYdX Chain validators nor operate or control the dYdX Chain network. dYdX Operations Services Ltd. is not responsible for any actions taken by other third parties who use dYdX Chain software. dYdX Operations Services Ltd. services and products are not available to persons or entities who reside in, are located in, are incorporated in, or have registered offices in the United States or Canada, or Restricted Persons (as defined in the Terms of Use). The content provided herein does not constitute, and should not be considered, or relied upon as, financial advice, legal advice, tax advice, investment advice or advice of any other nature, and you agree that you are responsible to conduct independent research, perform due diligence and engage a professional advisor prior to taking any financial, tax, legal or investment action related to the foregoing content. An asset's inclusion in a particular liquidity tier is not an endorsement or recommendation of the asset, and trading in any asset supported by dYdX Chain may involve material risks, including the risk of financial losses arising from market volatility or liquidation. The information contained herein, and any use of products or services provided by dYdX Operations Services Ltd., are subject to the Terms of Use.