Skew
Last updated
Last updated
As explained in the Funding section, Surge creates a feedback loop via the funding rate to attempt to balance the long and short positions taken by the central pool. In some instances, despite attractive funding rates to incentivise arbitrageurs, there may be an imbalance between the total longs and shorts, referred to as Skew.
An increase in Skew can be problematic, as it puts a greater strain on the liquidity provided by the central pool. If the Skew reaches beyond certain limits, the platform may prevent further skew-increasing trades from being executed, until such a time that traders take the opposing side to bring the Skew back into safe limits.
Skew risk is displayed above the chart as below for the BTCUSD pair (note, you may need to expand the status via the "+" symbol if this information is hidden).
In the example above, you can see the Skew Risk is quoted as 99.93%. This means that there is a particularly high degree of Skew in the central pool (in this case longs are outweighing the shorts) and traders will find it very difficult to open further longs or close short positions.
The maximum amount of Skew permitted by Surge is calculated as 15% of the pool's total liquidity. We can determine the pool liquidity by referring to the "Earn" page:
As above the pool liquidity currently stands at $467,330. Considering a permissible Skew of 15%, this gives a maximum Skew value of $70,099.5 ($467,330*0.15)
Referring back to the first image above, Skew Risk is currently at 99.93%. This means there is only 0.07% of available Skew, equating to a maximum skew-increasing trade of $49.
In the circumstance above, a trader intending to open a long position will find that any order above a size of $49 will not be executed by Surge as it would exceed the maximum Skew of 15%.
There are 2 ways in which the Skew Risk can be reduced:
An increase in pool liquidity.
An increase in positions which are skew-reducing (shorts in the example above)
Both of the above are incentivised by Surge, to naturally bring about an equilibrium in Skew. The liquidity pool provides an APY as described in the Liquidity Providers section and positions which reduce Skew tend to provide attractive funding rates, as described in the Funding section.
