TL;DR

• In the build up to trading, we are initiating a community process to build consensus around parametrisation of Reya Network. It starts with this post, with an initial proposal for the methodology behind these parameters.
• The methodology generates margin parameters. Appropriate values are essential to prevent insolvencies in the system, and therefore guarantee an orderly functioning of the markets.
• A period of comments will be opened, with a dedicated channel on Discord to discuss the specific questions posed below. Once the period of input finishes, a final proposal will be put to vote. If approved, it will mandate the multisig owners to compute the parameters according to the approved methodology, and set them as parameters within Reya Network.
• The margin methodology below follows industry standards, and has been appropriately back tested. It is especially conservative and includes a “phasing in period”, where the resulting parameters will be further conservatively adjusted while the trading activity in the Network fully stabilises.
• The first part of this article explains general concepts that will hopefully help community members of all backgrounds understand what is being discussed debate. The second section summarises the parameters that would currently result from this methodology, and tries to explain them intuitively. Finally, the last section is a technical, fully explicit explanation of the proposed methodology.
• In terms of timelines, Reya Network is growing quickly and as a result there are strict timelines during which discussion will take place and a final risk proposal will be put to community vote. These timelines are
  • Monday 29th April = Start of discussion
  • Thursday 2nd May @ midday UTC = Snapshot taken
  • Friday 3rd May @ midday UTC = Final proposal put to vote, which will last 48 hours
  • Sunday 5th May @ midday UTC = End of vote. If passed, the voted parameters will be loaded into the Network by the community multisig in advance of trading launch

Defining risk in Reya Network

As the Network ramps up, we are approaching the start of trading. Reya Network will be fully decentralised, with the network owned and managed by those that use it. In that spirit, we are starting a debate on risk parametrisation in the Network.

The fundamental risk parameter is the risk matrix, which determines margin requirements. It needs to be carefully and methodically chosen so as to avoid the risk of auto-deleveraging events (ADL) or even pool insolvency. It is important that the entire community is involved in deciding the methodological procedures to compute it, and that we all achieve as much consensus as possible.

However, because the risk matrix will need to be updated rather frequently, it is impractical that every single parameter update be put up to vote. Instead, we propose that the community agree on a methodology for computing the risk matrix. After that, the multisig owners will be responsible for operationally updating it strictly according to the methodology agreed upon in the vote. If changes are needed to the methodology, then those changes will be submitted to discussion and a new vote.

In that spirit, here is how we envision this process going:

1. We are preliminarily proposing below a methodology for the risk matrix. We have worked hard to find something that is both conservative and satisfies industry standards. You can find a fully explicit mathematical definition at the end of the article, but we have also included explanations that we hope will help readers with different backgrounds grasp what is at stake.
2. This is a preliminary proposal, and so it is not final. We encourage community members to give input. In fact, we have a few questions below that we encourage community members to address. A debate will be opened in a dedicated channel on Discord.
3. Once this period closes, we will incorporate as much feedback as possible in a final proposal.
4. A vote will be conducted on that final proposal, from Friday 3rd May @ midday UTC to Sunday 5th May @ midday UTC.
5. If the vote is approved, we will then compute and publish the final parameters that will be used in the Network when trading starts.

What are margin requirements?

A margin requirement is:

the estimated maximum loss

within a given liquidation period

predetermined confidence level

when liquidating a portfolio.

currency amount to be estimated

time-frame

risk level

Let’s take this by parts: