Liquidity Risk & Slippage Modelling
This section outlines how OLTA identifies and mitigates the risks associated with token liquidity and execution slippage across trading venues.
Nature of the Risk
Liquidity risk arises when an asset cannot be bought or sold quickly without significantly impacting its market price. In the crypto space, this is exacerbated by:
Shallow liquidity pools, particularly among mid- and lower-cap tokens. Many crypto assets outside the top-tier market caps have limited on-chain liquidity. Even modest trade sizes can result in significant price slippage, reducing execution efficiency and distorting index performance. Even modest trade sizes can lead to significant price slippage, affecting execution quality and NAV precision.
Fragmented markets across DEXs and CEXs. Token liquidity is often split across multiple decentralized and centralized venues, with differing pricing and depth. This complicates price discovery and increases the risk of inefficient trade execution.
Lack of institutional-grade market-making. Unlike traditional finance, crypto lacks stable participation from institutional market makers. This leads to thin order books, wider spreads, and price sensitivity during normal trading activity.
High on-chain gas costs during volatile periods. Network congestion during volatile events can drastically increase gas fees, delaying execution or making on-chain trades economically unviable.
If not properly accounted for, liquidity risk can lead to:
Misleading NAV calculations. Price feeds that ignore slippage or fail to aggregate liquidity may produce NAV values that do not reflect real trading conditions.
Skewed index weights. Illiquid tokens may be overrepresented in the index due to outdated or unfiltered market cap data, distorting true market exposure.
High execution costs for index entry/exit. Users may face increased gas fees and slippage, eroding returns or reducing the efficiency of portfolio rebalancing.
Slippage Modeling at OLTA
OLTA incorporates real-time and predictive slippage modeling to adjust pricing and enforce eligibility:
1. Slippage-Adjusted Pricing
All asset prices used for NAV and rebalancing are adjusted based on simulated slippage at trade size benchmarks (e.g., $10k, $100k).
2. Venue-Aware Execution Modeling
OLTA monitors both DEX and CEX liquidity for each asset and routes allocations accordingly via smart contracts or hybrid execution logic.
3. Exclusion Based on Slippage Thresholds
Assets that consistently fail slippage tests (e.g., >1% for $10k notional) are excluded from indices to preserve investability.
Monitoring & Adaptation
OLTA’s slippage models are recalibrated regularly based on trading data, volatility, and evolving market structure.
Risk dashboards provide live transparency into effective depth and modeled slippage for each asset in the index universe.
These mechanisms ensure that OLTA indices remain robust, transparent, and scalable—even in a fragmented and fast-moving DeFi environment.
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