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.
Current Liquidity Tiers are set forth in the table below. Please note that liquidity tiers contemplated in v4 software will be subject to adjustments by the applicable governance community.
ID | Market | Initial Margin Fraction | Maintenance Margin Fraction | Impact Notional |
0 | Large-Cap | 0.05 | 0.03 | 500 USDC / IM |
1 | Mid-Cap | 0.1 | 0.05 | 500 USDC / IM |
2 | Long-Tail | 0.2 | 0.1 | 500 USDC / IM |
3 | Safety | 1 | 0.2 | 2500 USDC / IM |
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.
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 default settings of dYdX Trading Inc. (”dYdX”) v4 software, or non-mandatory guidelines and suggestions that may help with using v4 software. dYdX does not deploy or run v4 software for public use, or operate or control any dYdX Chain infrastructure. dYdX is not responsible for any actions taken by other third parties who use v4 software. dYdX 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 dYdX 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 v4 software, are subject to the v4 Terms of Use.