Portfolio Leverage Limits
PTN currently sets limits on leverage utilization on a per-position basis. In conjunction with positional leverage limits, we want to mitigate the risks associated with high leverage by setting a threshold on total portfolio leverage utilization. This helps to better manage the potential change in influence a single miner might have on the overall network model.
Problem Statement
There are a number of potential challenges associated with high leverage usage from our miners. The first, addressed in proposal five, is that of high risk strategies managing to capture incentive from the subnet prior to collapse. This was one of the primary issues addressed in proposal five, which set a limit on the range of positional leverages based on the number of doubling intervals. However, two challenges remain:
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Highly correlated trade pairs may be used in harmony to effectively increase the capacity for utilizing a high risk strategy to gain reward from PTN.
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A substantial increase in typical leverage usage from a high scoring miner would substantially increase the network model resources allotted to the miner, increasing the risk of exposure should the miner deviate substantially from their prior behavior.
While the drawdown normalization process responds to quick changes by the miner, it is possible that consensus among miners and thus incentive may not be able to respond as quickly to rapid changes in miner leverage.
Proposed Changes
While the risk associated with Martingale is proportional to the number of doubling intervals, any risk associated with large increases in the positional leverage are proportional to sum of the ratio of max / min leverage, for all positions:
We can artificially constrain this by setting more aggressive limits on per position leverage, or by limiting the total leverage usage on the portfolio. The current limits on leverage are designed to give our miners more flexibility, particularly as we have seen some miners who choose to specialize in just one or two trade pairs. As such, we opt for the second route: a limit on overall portfolio leverage.
We propose limiting leverage for each portfolio to a 10x limit across all positions and asset classes. As different asset classes have different leverage limits, we propose to normalize the contribution of each trade pair to the maximum portfolio leverage by scaling each according to their max trade pair leverages. Crypto has a 10x lower trade pair leverage limit, so its normalized leverage contribution is multiplied by 10x.
| Asset Class | Trade Pair Leverage Limit | Trade Pair Leverage Multiplier |
|---|---|---|
| Crypto | 0.5 | 10 |
| Forex | 5 | 1 |
| Equities | 5 | 2 |
In effect, the portfolio leverage is calculated using the following:
Examples
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A 5x USDJPY position with a 2.5x NVDA position hits the portfolio leverage limit
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A 5x USDJPY position with a 0.5x BTCUSD position hits the portfolio leverage limit
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A 0.5x BTCUSD position with a 0.5x ETHUSD position hits the portfolio leverage limit
Additional Information
This will be a forward looking update, only setting restrictions on future positions. As with proposal five, we will allow our miners to gracefully transition their maximum portfolio leverage to a lower value if needed.
- Excess Leverage: Portfolios which exceed the leverage cap will be kept, but will only be allowed to reduce leverage until they comply with the new limits.
Timeline
Proposal Delivery: August 8, 2024
PR: August 8, 2024
Implementation: August 22, 2024