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8) But for a brief period, someone (almost certainly Alice) bought enough MNGO that it did trade for $0.40, and before people could get in to sell and return it to a more reasonable price, the risk engine had already allowed Alice to withdraw $100m from Mango Markets.

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9) So, what went wrong? Did the oracle fuck up? I mean, not really. Or, rather, it depends on what the specs of the oracle were. The oracle accurate reported the current price of MNGO. It's just that the 'current price' wasn't really anything close to the 'fair price'.

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10) What should you really do? Well, let's look at what FTX does, and why *it* didn't have any risk engine issues.

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11) First, FTX has EWMA price bands. What this means is, roughly, that FTX consumes raw price feeds. But, before feeding that into its risk engine, it bounds those price feeds so that they can't move more than ~20% over a 5 minute period.

Order Limits and Price Bands

Order Limits Users can’t send orders that would move the price more than 2% (for futures markets) or 25% (for spot markets) through opposite side of the book. Orders too far through the book get ...

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12) The reason, basically, is: b) If an asset's price moves 3x in 1 minute, it's decently likely to be bad data, or a temporary wick, or something like that b) If the asset's price stays there for 5 hours, that new price is likely the true economic price

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13) FTX's MNGO index price moved--there should be *some* update--but much less than others because of those EWMA price bands. In particular, while FTX's index topped out at a ~100% increase, on some exchanges the move (temporarily!) hit a +900% increase (!!!).

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14) Second, FTX uses 'IMF Factors'. The larger your position, the greater % margin we charge. For MNGO, the margin we charge is 0.00025 * sqrt(MNGO tokens). If you wanted to have a 500m MNGO position, FTX would have required, uh, 500%. (Bounded at 'fully funded'.)

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15) The reason, basically, is that large positions--especially in illiquid tokens--can have a lot of impact. So we charge more % margin the greater your position is.

Complete Futures Specs

As the terms of service make clear, manipulative behavior is not tolerated on FTX. Any attempts to do so may result in account termination at FTX's sole discretion. Indices Market price: median...

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16) And some positions -- like the one in question -- are large and illiquid enough that the risk engine forces you to fully collateralize a position.

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17) So even before hitting position limits, the risk engine ensures that the collateral backing a position is sufficient. And what if you try to use something other than dollars as collateral? Well, we haircut it. In some cases, a lot.

Spot Margin Trading Explainer

Overview With spot margin trading, users can trade with leverage and go short on spot markets by borrowing from other users (lenders) on FTX, who are looking to earn yield on their assets. Rates ...

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18) (It's worth noting that this is all referring to FTX International. In addition to all of the above protections, our amendment for FTX US Derivative's margin order would only be for BTC and ETH futures using USD margin. No MNGO, and certainly no MNGO collateral.)

12:15 PM · Oct 12, 2022Twitter Web App

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19) There are a bunch of other risk engine protections and sanity checks, too, which would have caught something like this. So -- back to the oracle. It reports: "MNGO: $0.40" Is it wrong?

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20) Well, it depends on what it's promising. But probably it's just promising to tell you, literally, what MNGO is currently trading at. And, for a brief period, on some exchanges, MNGO was in fact trading at $0.40. The real problem here was using the raw oracle price.

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21) The Oracle tells you everything and nothing--the history and current state of markets. It's the risk engine's job to consume that information, and decide what positions are safe. Sometimes it can't just regurgitate The Oracle. Sometimes it has to make up its own damn mind.

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22) Which doesn't mean that the risk engine needs to be manual. You can create a set of rules for it so that it's conservative, and handles apparent large moves gracefully. That, in the end, is probably the most important thing we do at FTX.

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23) And, really, it's why we started FTX in the first place. Tradfi had sophisticated (sometimes!), slow, manual risk models, and--in some FCMs--fast, egregious ones. Crypto had fast, automated, broken risk models. There was an opening for a thoughtfully automated risk engine.

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@lucyjoh81517512

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That why people need vote yes

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