The Leverage Descent

How Perpl bounds open interest so a position opened near the cap is over-collateralised enough to cover itself, and no position can grow into bad debt.

Every perpetual exchange shares one failure mode: a position too large for the market to absorb, force-liquidated into a backstop that can't clear it. In March 2025 a trader opened an oversized short in a thin memecoin on another venue (roughly $4M, about 40% of the coin's entire market cap) at 20× leverage, then moved the price so the position liquidated into the protocol's market-maker vault. The book was far too thin to take it; the vault inherited a deeply underwater position and its unrealised loss peaked near $12-13M.

Perpl's answer is a single on-chain rule. Each market has an open-interest cap, and as the market's open interest approaches that cap, the maximum leverage allowed on new size descends toward zero. It never slams a door; it makes size opened near the cap require so much collateral that the position is over-collateralised enough to cover itself. It can't create bad debt, so it never needs the order book or the insurance fund.

Open interest, and why it has a cap

Open interest (OI) is the total size of all open positions in a market. The cap keeps that total within a sane fraction of the underlying asset, sized against the coin's actual supply and what comparable venues carry, not against how deep the order book happens to be at any moment.

The important distinction: the cap and the descent bound solvency, not liquidity. A position opened near the cap is so heavily over-collateralised that a price move can't push it bankrupt; on liquidation it simply returns its own collateral. That's why it never needs the book to absorb it. This is the same idea as Hyperliquid's size-based margin tiers and dYdX's open-interest-scaled initial margin, expressed on a permissionless EVM.

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The descent, in one curve

One contract function maps a market's forward-looking open interest (the OI the market would have if your order filled) to the maximum leverage you're allowed. Below 90% of the cap, nothing changes. From 90% to 95%, leverage falls linearly to 1×. From 95% to the cap, it falls to 0.01×. At or beyond the cap, it's pinned at 0.01×; you'd have to post about 100× the position's value.

Figure 1: Max leverage vs. forward-looking open interest (15× example)

The curve is piecewise-linear in leverage. Required collateral is its inverse: it rises gently through the first band, reaches 1× the notional at 95%, then climbs toward ~100× the notional at the cap. Closing a position is never affected.

What the descent actually does

It's forward-looking. The leverage cap is computed on the OI the market would have if your order filled; your own size counts. A large order near the cap prices itself out.
It only touches opening and increasing. Closing or reducing a position is never penalised, at any OI. You are never trapped in a position because a market filled up.
Your liquidation price doesn't move. The descent sets the leverage on new size. The maintenance margin on an existing position is fixed when you open it and does not change as the market fills.
It's identity-blind: no sybil detection needed. It reads one number, the market's total open interest, never who is trading. Splitting a position across ten wallets doesn't help: the market's OI is unchanged, so the collateral demand is unchanged. Per-account limits, by contrast, have to detect and cluster sybil wallets just to hold.
Near the cap, a position is self-insured. Because opening near the cap demands so much collateral, any position that exists up there is over-collateralised enough to return its own collateral on liquidation. No backstop draw, no bad debt.

The message to a trader is never "blocked." If a market is in the top 10% of its cap, opening or increasing simply costs more collateral for the same size, shown as a lower maximum leverage. Closing stays free, and existing positions are untouched.

Effective maximum leverage as OI climbs

The same piecewise rule applied to three static leverage settings. Below 90% the trader gets the market's full leverage; by 95% every market is at 1×; at the cap every market is at the 0.01× floor.

Market (static)	< 90%	92%	95%	97%	100%
Major (15×)	15×	9.4×	1×	0.6×	0.01×
Alt (10×)	10×	6.4×	1×	0.6×	0.01×
Long-tail (5×)	5×	3.4×	1×	0.6×	0.01×

Illustrative leverage settings. The thresholds (90 / 95 / 100%) and the 0.01× floor mirror the on-chain contract; the numbers per market are round examples, not any live market's real limit.

The naive ways to do this, and why they don't survive here

There are two obvious ways to stop an oversized position. Both work off-chain; both break on a permissionless chain.

Naive #1 · hard cap

Slam the door

Reject any order once the market hits the cap. Simple, but it's a cliff: fine until the wall, then legitimate traders are blocked outright, and it says nothing about the position sitting just under the cap that's still only 5% collateralised. It bounds the total, not the solvency of what's inside it.

Naive #2 · per-account tiers

Lower leverage as you grow

Drop a trader's max leverage as their own position grows, the way CEXs and app-chains do it. It works when you know who the account is. On a permissionless chain you don't: split the position across ten wallets and each stays in the cheap, high-leverage tier, rebuilding the same oversized position with none of the margin. Defending it means detecting and clustering sybil wallets: an arms race you don't win.

Perpl · aggregate descent

Key on the market, not the account

Descend leverage on the market's total open interest. Splitting across wallets changes nothing: the market's OI is identical however many wallets you use, so the collateral demand is identical too. No sybil detection required; it's immune by construction. And because it descends rather than blocks, size near the cap is over-collateralised instead of turned away.

Figure 2: The three approaches, on the same axes (schematic, 15× market)

All three give full leverage until open interest (OI) reaches 90% of the cap. From there they diverge. The hard cap (red) holds full leverage to the wall, then rejects every order at once, a cliff that also turns away legitimate traders. Per-account tiers (amber) lower a trader's leverage as their position grows, but only while the position sits in one account: split it across ten wallets and each stays at full leverage, flattening the amber line back to the top. Perpl's descent (indigo) keys on the market's total OI, so it lowers leverage smoothly toward the cap and can't be gamed by splitting across wallets. Schematic, illustrative leverage values.

A centralised exchange enforces per-account tiers off-chain, trusting the operator. An app-chain like Hyperliquid runs its exchange as native chain logic, so it can add size-based tiers or adjust OI caps by upgrading the protocol itself. Perpl has neither option and needs neither: on a permissionless EVM the rule lives in the smart contract, enforced on every order. Bounding OI relative to supply and descending leverage before the cap gives the same protection, keyed on aggregate OI so it can't be split across wallets.

The reference incident. The March 2025 memecoin blow-up (an oversized position in a thin, manipulable market absorbed by an under-funded backstop) is exactly the outcome an OI cap plus a leverage descent makes impossible. The dangerous action (a large one-sided position near the cap) is the one the mechanism taxes hardest.

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