Introducing Isolated Markets and Isolated Margin

TL;DR

Isolated Markets are markets that have segregated collateral pools and insurance funds, which enables a protocol to support a greater range of markets with varying risk properties
Isolated Markets are traded with isolated margin
The new market widget will be expanded from ~20 markets 800+ potential markets

Overview

We are excited to share that isolated markets will be included in Release 5.0 of dYdX Trading’s v4 open source software suite, which is set to be officially released within the next couple of weeks.

The below blog post outlines what isolated markets are, what they enable, and how they will be implemented in the product via isolated margin.

Isolated Markets

Currently, dYdX Chain only permits markets that are cross-margined at a protocol level, which means they share the same collateral pool and insurance fund. All markets that are cross-margined contribute to the overall risk properties across the entire protocol. As a result, the universe of available markets on any live deployment of dYdX Chain has been constricted by the need to protect the solvency and functionality of the protocol as a whole.

Isolated markets are markets that have segregated pools of collateral and their own insurance fund. Each isolated market, then, has its own individual risk properties. This enables a protocol to more safely support a much greater range of market types.

Market Universe

Today, the new market widget, which optionally ingests markets from v4-web, lists roughly 20 markets that can be listed as cross-margined markets in a manner consistent with optimal software performance.

After the release of isolated markets, the new market widget universe will be expanded to >800 potential markets. Markets that will be available to list via the widget will include ones that are available on at least two centralized exchanges, or ones that are available on at least one decentralized exchange and fulfill certain liquidity and market-cap guidelines. These guidelines are subject to change and are strictly recommendations from an optimal software compatibility perspective. Methodology regarding the new market widget universe will be open sourced at docs.dydx.exchange.

In addition to the new market widget, users retain the ability to propose a fully customized market listing by following the instructions here. In making any decision on proposing new markets, users are encouraged to consider the open-sourced information provided via the new market widget, and to weigh other factors that may be relevant to listing decisions, such as the market’s trading volume, liquidity, market cap, as well as its development history and track record, technical robustness and security, susceptibility to fraud, manipulation, rug pulls or other inappropriate practices, and compliance with the laws of relevant jurisdictions.

This will be the first time that prices are queried directly from decentralized exchanges on dYdX Chain. The initial protocol that validators will be able to query from is Raydium. As a result, Raydium markets will be available to list on dYdX.

The number of available markets available to query should grow over time as more oracle sources (more decentralized exchanges) are added to the software. The next protocol that validators will be able to ingest from will likely be Uniswap v3 on Base.

Adding new markets

Adding new markets will work the same way they currently do today — via governance. Eventually, adding new markets to dYdX Chain will be fully permissionless. This will enable markets to be listed instantly without going through any governance process. Stay tuned for more details.

Isolated Margin

From a trader’s perspective today, all orders and positions are cross-margined against each other — if you have a BTC-USD and an ETH-USD position open, your collateral requirements on both change as one position’s price moves. This makes collateral management for traders more difficult to manage and predict. The more open positions a trader has on cross, the harder it becomes to effectively control collateral and predict margin requirements.

Isolated margin introduces the option for traders to trade any market as an isolated position. Thus, traders will have the ability to confine collateral to a specific position, and manually adjust their collateral for that given position. This enables users to be able to more intuitively control and understand their collateral management.

All isolated markets need to be traded with isolated margin. Markets that are cross-margined on the protocol can either be traded with user cross or isolated margins via the UI.

FAQs

Are isolated markets safe?

Crypto-assets are often volatile, and each isolated market has its own risk properties. It is up to the trader to conduct appropriate research and decide what risk they are comfortable trading. Some properties traders should consider before trading an isolated market are the oracle sources being used for a market and the spot liquidity for that market. As a general rule of thumb, as a market has fewer oracle sources and thinner liquidity, the riskier it becomes.

Can isolated markets be upgraded to cross markets?

In Release 5.0, no. In a future release, functionality will be built for governance to upgrade an isolated market to cross.

Can you tell me a bit more whats happening at a protocol level when using Isolated Margin?

Isolated margin utilizes native subaccount functionality on the protocol. Therefore, the UI moves collateral from a trader’s cross subaccount (subaccount 0) to other subaccounts that have zero open positions or orders in them. When an isolated subaccount has zero open positions or orders in it, collateral in that subaccount will be moved back to the trader’s cross subaccount (subaccount 0). More information on the mapping of subaccounts that the funds are moved to and from will be open sourced at docs.dydx.exchange.

Legitimacy and Disclaimer

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain’s infrastructure.

The dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.

The dYdX Chain software is open-source software to be used or implemented by any party in accordance with the applicable license. At no time should the dYdX Chain and/or its software or related components be deemed to be a product or service provided or made available in any way by the dYdX Foundation. Interactions with the dYdX Chain software or any implementation thereof are permissionless and disintermediated, subject to the terms of the applicable licenses and code. Users who interact with the dYdX Chain software (or any implementations thereof) will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation does not make any representations, warranties or covenants in connection with the dYdX Chain software (or any implementations and/or components thereof), including (without limitation) with regard to their technical properties or performance, as well as their actual or potential usefulness or suitability for any particular purpose, and users agree to rely on the dYdX Chain software (or any implementations and/or components thereof) “AS IS, WHERE IS”.

Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone. Users should conduct their own research and due diligence before making any decisions. The dYdX Foundation may alter or update any information in this post in the future at its sole discretion and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it was published and should only be read and taken into consideration at the time it was published and on the basis of the circumstances that surrounded it. The dYdX Foundation makes no guarantees of future performance and is under no obligation to undertake any of the activities contemplated herein.