3. Price Stability

Price impact limits protect low-liquidity markets from manipulation by constraining how far the mark price can deviate from its time-weighted average. This safeguard prevents liquidation cascades and profit-and-loss manipulation that could otherwise exploit thin order books in early-stage markets.

Defining Position Caps

One of the key drawbacks of AMMs as price oracles is their susceptibility to manipulation with sufficient capital. This is especially pertinent in low-liquidity environments. In perpetual futures markets with thin liquidity, these attacks are particularly dangerous, leading to liquidation attacks or PnL manipulation. To defend against this, each market enforces a maximum deviation between the mark price and its $\mathsf{TWAP}$.

A perp's price impact limit module defines how much percentage deviation is allowed either upward or downward. These values can be fine-tuned or dynamically adjusted as markets mature. Early markets may require tighter limits to deter manipulation, while mature, liquid markets can relax them safely.

Time-weighted average prices also serve as a safeguard as previously described.

Trading With Price Impact Limits

Price impact limits only affect actions that move prices, such as opening or closing taker positions. For taker positions being opened with sufficiently large notional trade size, the resultant swap is halted once the price impact limit is reached. That is, the position is partially filled, and the remaining unfilled size cancelled. Similarly, if a close would breach the impact limit, the trade is partially closed and the remainder left open.