Why Perps Are Not a Risk-Free Hedging Tool—Especially During Crashes

Transcript

I think many people kind of realize on Friday uh that per may not always be um the the strongest or safest instrument. I think yeah I mean part of the the story of of Friday is learning about uh counterparty risk and exchange risk. Uh so for instance um I mean we saw a lot of people get liquidated on the long side but then on the short side once ADL kicked in to secure exchanges solvenies um many people's short positions also got closed uh oftent times you know at P&Ls much lower than they would have they would have expected um I think this has the potential to have realized pretty significant losses um for uh

funds running uh long short short strategies, funds running like delta neutral strategies, market makers like like GSR, we obviously we run like delta neutral strategies. Um but we're not only using per uh so I mean fortunately for us um uh we were not majorly affected. Um but it it can be the case um that other kind of big funds um might have been >> I've been in crypto over a decade uh since 2015 and um I have a lot of friends running liquid funds and also some of the their traders either on the CX or the sort of perex um the so right after this kind of crash I have a bunch

of call with them uh some of them got hit um the thing is like as uh Stephen just mentioned, right? Um the thing is like previously people feel like per is super useful. Um and uh they do h they do hedging like sort of the lungs um these kind of all coins and do short on uh sorry they long like sort of bitcoin and do short on all coins for example long on bitcoin short on dodgecoin but during the crash due to the ADL their short position was uh forced to close so in that case there are no more like sort of hatch and um due to whatever reason glitches of the server whatever right

you couldn't put bees on time so that that's sort of like basically during the crash any hatch no longer working so what you can do at that time like basically try to hold all assets in spot so so that that's why a lot of my friends after this kind of crash they told me that uh don't use purple for hygiene anymore um the uh because like another issue is still back to the Oracle issue a lot of these CX, DX um they are using uh the spot price as a mark price um and uh so as R mentioned right there there's basically no liquidity during the crash and uh you can easily manipulate the spot price uh

further liquidation from the others whatever it further drop that sort of the mark price for per so in that case like you come to Hatch and you can only hold that sort of the assets um beyond that um is like um like based on their feedback, right? Another thing they mention is like um so basically the liquidity or the spread on uh on like sort of CX or DX um is not trustworthy as Raj mentioned right you can have some phantom or ghost like sort of spreads and uh once there was a crash happening right it's basically all liquidity withdrawn and u like one thing like

probably we can trust is AMF uh because most of the LPS on chain and uh you can't like sometimes like the chain like sort of got stuck right you couldn't really withdraw the asset immediately so the liquidity just stick there um but but in general I just feel like the main issue is still like um we need more this kind of liquidity around this kind of crash of course it's super risky um but um like I just feel like it's if we don't have enough liquidity like like basically around this kind of crash.

There's so many places can be manipulated.