Open Interest

Understanding Open Interest

The Open Interest of a symbol is the total number of outstanding contracts currently held on that symbol. It serves as an indicator of market activity and liquidity. However, excessive open interest can pose risks to the stability of a trading platform, particularly in the decentralized finance (DeFi) space.

Open Interest Multiplier

In December 2024, we introduced a new algorithm involving a multiplier to calculate the initial margin requirement of a trade on Deri. First, we define a (soft) bound of Open Interest as one half of the Open Interest Hard Limit that was defined in the previous mechanism. And then we calculate Open Interest Multiplier (OIM) as follows:

$$OIM = max(\frac{Open Interest}{Open Interest Bound}, 1)$$

With this risk management measure, the initial margin requirement is multiplied with OIM. That is, when the Open Interest of a symbol surpasses its Open Interest Bound, OIM becomes greater than 1 and subsequently the protocol starts to increase the initial margin requirement. That is,

$$Final Initial Margin Ratio = Standard Initial Margin Ratio * OIM$$

Note that OIM does not affect maintenance margin requirement and thus does not impact the mechanism of liquidation.

Open Interest Limits

Additional to the adjustment of initial margin requirement, we also implement the following two “hard limits” on OIM, and hence on the open interest:

• When OIM > 4, only trades decreasing Total Net Position can be placed.

• When OIM > 8, no trades can be placed any more.

That is, the overall hard limit of OIM is 8, while the hard limit of OIM for increase-net-position trades is 4. In other words, the range [4, 8] of OIM is reserved for trades decreasing net positions. With such a setting, trade decreasing net positions can always be placed and executed.