🛑Protocol Risks

Perennial V2 was designed to minimize situations where makers or takers are at risk of loosing exposure to markets. However, in very specific situations certain conditions can cause the protocol to limit functionality or reduce exposure. See the two cases below:

Taker OI approaches Maker OI --> Maker positions cannot be closed

Perennial works the same way as Compound or Aave when utilization is high. Rates are increased dramatically to increase liquidity (and incentives demand to reduce exposure). However, it is possible that this could result in a liquidity crunch, where makers are unable to close positions because doing so would push utilization over 100%.

However, this type of event is unlikely to occur, and if it were to occur, would likely be very short-lived. Perennial's funding-rate mechanism is specifically designed to combat this situation. If taker utilization ever approaches (or exceeds) 100%, the funding rate aggressively increase toward it's max value (a parameter intentionally set extremely high) such that arbitrageurs provide additional liquidity to take advantage of the high yield (perhaps offsetting on a CEX to avoid risk) and/or takers close positions to avoid paying a high funding rate.

Takers OI > Maker OI --> PnL Socialization

Even though Perennial caps takers open interest at maker open interest, in the event LPs are highly leveraged & taker utilization is high, it is possible that enough maker positions would be liquidated such that there are more taker positions outstanding than maker positions. If this were to occur, Perennial resolves via PnL socialization, meaning takers would have pro rata exposure to maker positions. During this time, takers are able to reduce open interest, but they would not be able to increase open interest.

This would be exactly the opposite of how the system typically works, where makers get pro-rata exposure to taker positions

Similar to the edge case above (taker OI approaches maker OI), the economics of the system are designed to quickly reverse this case.

For both cases, These should be viewed as very rare situations, and Perennial has internal & external mechanisms at play to prevent and/or quickly reverse the situation to return the protocol to normal operation.

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