Nigel, the head of Perpetual Protocol China, explained the reason for the flash crash of the ETH contract to improve the plan.
Author: Nigel, Head of Perpetual Protocol China
On the morning of April 18th, as the crypto market plummeted across the board, at one corner of the chain, the ETH market in Perpetual Protocol had a flash crash, and the lowest price was hit to 880 US dollars, compared to the price of 1930 US dollars on centralized exchanges. , Showing an abnormal state. We reviewed this incident through the on-chain log, and at the same time, we also proposed some mechanism updates for the prevention of similar incidents. Finally, this article will elaborate some thoughts on this flash crash.
Part 1: What happened?
At about 11:30 am on April 18th, Beijing time, the price of ETH in the spot market was pinned to around 1900-1950 US dollars. As perpetual is a leveraged contract market, it triggered the liquidation of a large position user. A series of explosions stepped on the ETH price all the way down. Unfortunately, at the same time, when some users who noticed the price deviation wanted to recharge to open a multiple order of ETH, the xDai network was congested, and the asset bridge from the first layer of Ethereum network to xDai stopped more than 20 minute. These combined factors contributed to this flash crash.
Centralized exchange ETH price
Part 2: Our response
We are serious about the flash crash. At the end of February, the BTC/USDC market also had similar problems due to the violent market fluctuations. We also made some protocol upgrades in response to the flash crash, and some similar positions Liquidation, open source arbitrage robots, etc. Due to the limitation of development resources, we have implemented some functions, and some are still under development. The good news is that the contract audit of the most important part of the position clearing function has been completed, and we will deploy it at a suitable time in the near future.
After the incident, the team conducted multiple rounds of discussions, hoping to avoid similar situations as much as possible in the future. No matter from the product design mechanism level or the development level, we will work harder to make the perpetual agreement a better chain. On the DeFi derivatives agreement.
Here are some of our update plans:
Partial position liquidation mechanism
The current liquidation mechanism is to close all positions at once, and after the update, users will be allowed to close some positions when there is a profit or loss.
Upgrade margin rate calculation method
The current margin rate calculation comes from the mark price. We will upgrade this mechanism to change it to: When the mark price deviates from the index price by more than 10%, the index price is used for the margin rate calculation.
Increase the upper limit of opening positions
The purpose of this is to allow Giant Whale users and market makers to use perpetual agreements to open large positions when the market fluctuates so that the asset prices in the perpetual agreements are close to external prices.
Improvement of web services
Due to various reasons, the webpage sometimes has a delay or a stuttering lower limit, which will have a certain impact on the user experience when the market fluctuates sharply. We will improve the service capabilities of the webpage to meet a wider range of user needs.
Limit order function
The limit order function will protect the user’s position to a certain extent, and the user can set a limit price to close the position at the same time as the position is opened. This function is currently under development and a round of testing has been carried out, and we will launch this function after the completion of the test.
In addition, in response to this incident, there have been many discussions in the community. Some community members have proposed to compensate users who have suffered losses. There is already a post on gov.perp.fi to discuss compensation. If the voice is louder, It is possible to vote on the compensation plan.
Part Three: Some Thoughts
This part is more of the author’s personal views, and does not represent the position and attitude of the perpetual agreement team.
Compared with centralized exchanges, providing services that amplify capital efficiency on the chain is a matter of courage, especially when this service is directly related to transactions, it will be more like walking on thin ice. As the first agreement to introduce AMM into derivatives and design the vAMM mechanism, the perpetual agreement has maintained the robustness of growth in the more than four months since its launch, and has also experienced some unexpected situations that made the team temporarily It requires serious thinking and confrontation.
When most of the market fluctuates sharply, due to various reasons, centralized exchanges usually have problems such as stalls and downtime. I have no intention to speculate and trace whether this is caused by man-made on the B side or the agitation on the C side, but what is certain is that In these trading scenarios, there is an invisible hand that is pulling the sentiment of the market, and it also affects the price of assets to a certain extent.
This is why every now and then, asset price fluctuations on DEX will have a hysteresis and a reduction in amplitude. Many people are accustomed to using GAS fees to form a DeFi moat to explain this phenomenon, but in my opinion, assets on the chain are more responsive Real market sentiment and real asset prices.
Similarly, perpetual agreements should, of course, avoid the recurrence of flash crashes as much as possible, and prevent them through a variety of combined mechanisms. But I am also willing to believe that where there is no such “invisible hand” to regulate asset prices and emotionally guide the market-I call it a land of no ownership, where the instantaneous asset prices may be more real. Because when the perpetual agreement ETH price flashed to 880 US dollars, Kraken’s ETH price was also around 900 US dollars, it is a coincidence or necessarily worth thinking about.
I think that when we sort out the context of these misty problems, it will also be that people’s trading habits tend to be on the chain, and the moment when most transaction behaviors are concentrated on the chain, DeFi will also be on the various tracks. Usher in the emergence of the next quality agreement.
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