VMP-31 Terminate the LINK-USD Perp market
Following on from previous discussion about terminating the dysfunctional SOL market, I think it is appropriate to consider terminating and re-proposing the LINK Perp as well.
Rationale:
The LINK-USD Perp currently has a price decimals value set equal to 2. This means that the highest price precision we can achieve on that market is 2 decimal places, making the smallest increment of price $0.01, with a current price of $13.99, the means that the smallest price increment is roughly equal to 7.1 basis points.
Having such a large gap between discrete price levels harms LPs ability to quote at the fair value of the asset. They will naturally round their best bid down and their best ask up so that they do not inadvertently give away arbitrage opportunities. This results in wider spreads and this can exacerbate the funding rate issue.
Also consider that with discrete price levels being 7 basis points apart that it is not possible to achieve a spread less than 7 basis points. This is larger than the trading fee and causes a poor user experience. To enter and exit a position with a 7 basis point spread costs 14 basis point, add the 4.5 basis point fee each way for taker orders and you have a total cost of 23 basis points in the BEST case scenario. As such, it is clear that this market does not provide a good user experience and should be fixed ASAP.
It is worth noting that the decimals of a market cannot be amended, and as such I think the best course of action is to suspend, then terminate and settle the market. A new LINK market can then be proposed with reasonable decimals as well as a new data source spec that utilises a LINK Uniswap pool instead of a Chainlink oracle.
Full Proposal JSON:
Suspend:
{
"rationale": {
"title": "Suspend the LINK/USD Perp market.",
"description": "The LINK/USD-Perp is dysfunctional due to a poor choice of decimals for the market. Since decimals are immutable, the market must be terminated and re-created from scratch to modify the decimals. The LINK Perp also suffers from severe fluctuations in the funding rate. These fluctuations are caused by a combination of infrequent oracle updates and unreliable mark prices used in the funding calculations that occur as a result of LPs quoting wide. This proposal seeks to suspend the LINK Perp market in preparation for settlement and termination."
},
"terms": {
"updateMarketState": {
"changes": {
"marketId": "74f8bb5c2236dac8f29ee10c18d70d553b8faa180f288b559ef795d0faeb3607",
"updateType": "MARKET_STATE_UPDATE_TYPE_SUSPEND",
}
},
"closingTimestamp": 1705953600,
"enactmentTimestamp": 1705953600
}
}
Terminate:
{
"rationale": {
"title": "Terminate the LINK/USD Perp market.",
"description": "The LINK/USD-Perp is dysfunctional due to a poor choice of decimals for the market. Since decimals are immutable, the market must be terminated and re-created from scratch to modify the decimals. The LINK Perp also suffers from severe fluctuations in the funding rate. These fluctuations are caused by a combination of infrequent oracle updates and unreliable mark prices used in the funding calculations that occur as a result of LPs quoting wide. This proposal seeks to terminate and settle the LINK Perp market ."
},
"terms": {
"updateMarketState": {
"changes": {
"marketId": "74f8bb5c2236dac8f29ee10c18d70d553b8faa180f288b559ef795d0faeb3607",
"updateType": "MARKET_STATE_UPDATE_TYPE_TERMINATE",
"price": TBC
}
},
"closingTimestamp": 0,
"enactmentTimestamp": 0
}
}