Soft Skewness Cap

A Limit on opening new orders.

The Soft Skewness Cap is a crucial mechanism in Aark's protocol designed to control the size of open interest and thereby limit the risk exposure of the liquidity pool. Understanding the difference between "opening" and "closing" orders is essential to fully grasp the concept of the soft skewness cap.

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

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

The soft skewness cap restricts the size of the open interest that can be created through "opening" orders. However, "closing" orders are acceptable simultaneously unless the skewness size exceeds the 'Hard Skewness Cap' (a separate mechanism explained on the next page).

Example:

Assume that the soft skewness cap is 1,000 ETH and the current size of the skewness is 990 ETH. Bob already has a long position.

• If Bob tries to open an additional 20 ETH longs, the order is not valid since Bob is "opening" the position, resulting in a skewness size of 1,010 ETH, which is greater than the soft skewness cap (1,000 ETH).

However,

• If Alice owned 20 ETH short at the same time and now tries to "close" her entire position, the order is valid even though the size of the skewness becomes greater than the soft cap (1,010 ETH > 1,000 ETH). This is because Alice is "closing" her position.

Conclusion

The Soft Skewness Cap is a fundamental mechanism that helps regulate the open interest in Aark's protocol. It prevents the creation of new positions that would result in a skewness greater than the soft cap, thus limiting the risk exposure of the liquidity pool. However, it does not restrict the closing of existing positions, even if it temporarily results in a skewness greater than the soft cap. This design ensures a balanced approach to risk management while providing flexibility for traders to manage their existing positions.