Active MM Vaults

1. Venue & Protocol Risk

Active MM vaults depend on the safety and performance of the primary venue. Risks may include:

• Smart contract / code risk where applicable

• Matching engine, market data, or risk engine failures

• Governance or operational incidents at dYdX

• Venue rule or fee changes that impact maker profitability

2. Market & Microstructure Risk

Market making performance is sensitive to volatility and orderflow quality. Risks include:

• Sudden volatility spikes that degrade fill quality

• Liquidity shocks that increase inventory risk

• Directional regimes where two-sided quoting is less effective

• Market structure changes that reduce sustainable spreads

3. Market Making / Strategy Risk

Unlike passive LP, these vaults rely on active quoting and inventory control. Risks include:

• The strategy may underperform during low-volume or highly directional markets

• Quote width, depth, and inventory targets may be suboptimal in certain regimes

• Profitability may decline if incentives or maker programs change

• Concentration risk from a single primary venue

4. Adverse Selection & Execution Risk

Active quoting introduces the risk of trading against faster or more informed flow.

• The strategy can be adversely selected during fast markets

• Latency and execution quality can materially impact outcomes

• Slippage and spread compression may reduce net returns

5. Hedging & Basis Risk

To manage inventory risk, the vault may hedge on Lighter and Defx. This introduces:

• Hedge execution risk during rapid price moves

• Basis risk between dYdX instruments and hedge instruments

• Timing risk (hedges applied too late or too early)

• Potential carry drag from funding, fees, or spread costs on hedge venues

6. Borrowing & Collateral Risk (dYdXBTC / dYdXETH)

The BTC and ETH variants may use Aave to borrow USDC as working capital. Risks include:

• A sharp decline in the collateral asset can reduce collateral health

• Rising USDC borrow rates can reduce or negate net yield

• The vault may need to deleverage during adverse conditions, impacting returns

• There is potential liquidation risk if market moves are extreme and rapid

7. Liquidity & Withdrawal

Withdrawal speed and sizing may be influenced by active positions and hedges.

• The vault may require staged de-risking before final settlement

• In stressed conditions, unwinding inventory and hedges may take longer or be more costly

• Temporary buffers may be maintained to support orderly redemptions

8. Operational Risk

Running an active MM strategy involves operational complexity:

• Dependencies on off-chain monitoring, quoting systems, and risk dashboards

• Reliance on venue APIs, market data, and supporting infrastructure

• Human or process error in strategy configuration and incident response