Hard Skewness Cap

A Limit on all orders.

The Hard Skewness Cap is another critical component in Aark's protocol designed to strictly control the skewness of the market, thereby safeguarding the liquidity pool from excessive risk exposure. This cap is more restrictive than the 'Soft Skewness Cap' as it imposes an absolute limit on the skewness, regardless of whether the orders are "opening" or "closing" positions.

• As a reminder, an "opening" order is an order that increases the size of a position, either long or short.

• A "closing" order is an order that reduces the size of a position, either long or short.

The hard skewness cap stipulates that the size of the skewness can never exceed the hard skewness cap under any circumstances. Even "closing" orders are unacceptable if they result in the skewness exceeding the hard skewness cap.

Example

Let's illustrate this with an example:

Assume that the hard skewness cap is 2,000 ETH and the current size of the skewness is 1,990 ETH.

• If Alice tries to "close" a 20 ETH short position, this order would not be valid, even though she is "closing" her position. This is because it would result in a size of skewness of 2,010 ETH, which is greater than the hard skewness cap (2,000 ETH).

Conclusion

The Hard Skewness Cap is a vital mechanism that enforces a strict limit on the market skewness in Aark's protocol. Unlike the soft skewness cap, the hard skewness cap does not allow any exceptions, even for "closing" orders. This absolute limit on skewness ensures that the risk exposure of the liquidity pool is kept within acceptable bounds at all times. It is a crucial tool for managing risk and ensuring the stability and sustainability of the Aark protocol.