Overview

With the exception of AMM payout risk, all risks are similar to those of perpetual futures. The Hyperliquid documentation provides further details on these risks.

Financial and market risk

Market manipulation

DERPs are designed to work with any asset, including illiquid ones. This means the underlying asset can be manipulated, which can lead to significant losses for traders.

This risk is mitigated by:

• the real value mechanism, which prevents traders from taking more than 100% of the liquidity pool - this means manipulation is always limited to a single market,
• not using the underlying asset as collateral, preventing short squeezes.

Price oracle risk

Just like perps exchanges, derp.trade relies on price oracles to determine the prices of underlying assets. This means compromised oracles can affect DERP traders.

Currently, the prices of all tokens listed on derp.trade are calculated directly and in real time using spot liquidity pool reserves. This yields a price denominated in SOL which is converted to USD using the Pyth SOL/USD oracle. As a result, derp.trade only takes on risk associated with a single well-trusted oracle.

AMM payout risk

AMM payout risk occurs when the AMM liquidity pool holds less value than would be needed to pay out the full PnL of a position. This can happen if the AMM is not sufficiently capitalized or if the underlying asset's price moves significantly.

Under those conditions, the real value mechanism ensures that traders can only withdraw funds up to the total AMM liquidity.

This risk is mitigated by:

• overcapitalizing the AMM: it is both the recipient of the profits from the sale of DERPs and funding rate payments,
• encouraging traders to hold longs and shorts equally with skew adjustment mechanisms,
• not liquidating the AMM, allowing traders to hold their positions for longer periods to wait for the liquidity pool to recover.

Infrastructure risk

Internal infrastructure

DERPs are a new asset class. This means there is risk of bugs in the code or design of the protocol. We are mitigating this risk by making use of tests and simulations, and we are planning to commission third-party audits.

External infrastructure

DERPs use well-established external infrastructure, like the Solana blockchain. This means that the risk of external infrastructure failure is a possibility, but it is not a major concern in the short term.

The protocol is designed to be resilient to external infrastructure failures and other interruptions to service.