Overview
This article outlines Deribit approach to index calculation, monitoring, quality assessment and settlement. These are for educational purposes only, the below are not official Deribit policies. The below assumes that a virtual asset has been already approved by the VARA for listing. Deribit has listing policies and approval procedures before the index methodology and constituents are considered.
Calculation Methodology
The Deribit Index is calculated using a capped median methodology to maintain stability against outliers from individual exchanges. Each index constituent is assigned a weight between 0 and 100%. Below is a step-by-step breakdown of how this methodology is applied:
Step 1: Median Calculation
At any given point in time, the median of the index data set is computed from prices provided by various exchanges and proxy sources.
For example, given an initial index set of:
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Source A: 100, weight 25%
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Source B: 101, weight 50%
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Source C: 120, weight 25%
The initial median of this set is 101.
Step 2: Capped Median Calculation
Next, the capped median is computed for each constituent price to limit the impact of large price deviations. This is done by applying upper and lower caps to each constituent price, using the median.
Lower Cap Calculation
The Lower Cap is the higher value between:
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0.5% below the initial median
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The actual exchange value.
Thus, the Lower Caps are as follows:
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Source A: 100.495
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Source B: 101
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Source C: 120
Upper Cap Calculation
The Upper Cap is the lower value between:
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0.5% above the initial median
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The actual exchange value.
Thus, the Upper Caps are as follows:
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Source A: 100
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Source B: 101
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Source C: 101.505
Step 3: Capped Median Selection
The capped median is the value closest to the initial median between the Lower Cap and the Upper Cap for each price source. This calculation is repeated for all data points from various exchanges and proxy sources.
For the above example, with three initial values (100, 101, and 120), three separate capped median calculations are performed.
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Source A: 100.495
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Source B: 101
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Source C: 101.505
Step 4: Index Value Calculation
The final index value is calculated as the weighted average of the capped medians from all sources, including both exchanges and proxy sources. For the example, this would give:
100.495 * 0.25 + 101 * 0.5 + 101.505 * 0.25 = 101
Safeguards
Algorithmic safeguards
Next to the capped median methodology as outlined above, Deribit has a large set of safeties built into the index calculation itself.
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Deribit requires that each index used for settlement has at least one active constituent. If an index has no constituents, then all related derivatives halt until the underlying issue is resolved.
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Deribit has a layered system of circuit breakers. If an index moves more than 10% in between index ticks (1 second), the related derivatives are halted.
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If a constituent does not update at least every 3 minutes, that constituent is removed from the index.
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Deribit has proxy indices. When a certain currency pair is not liquid enough, another currency pair with the same base currency can be added to the index, together with an exchange rate between the two different quote currencies. The proxy index counts as one index constituent.
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When only two index sources are available, the maximum allowed spread between them is 2.5%.
Real-time monitoring
Deribit has 24/7/365 coverage with their market operations, technical and risk management teams. A number of alerts and dashboards provides them with insight on the functioning of Deribit’s indices in real-time:
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Deviations between the index constituents.
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Deviations between the index and the related perpetual future, if present.
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Deviations of the index with an externally replicated index.
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Rapid index movements. Specifically, index changes of more than 5% in 30 minutes.
Deribit also monitors some other indicators of bad index prices less frequently and without alerts:
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The 24-hour volume of each index constituent. If this is deemed too low, the index constituent is temporarily turned off by a member of Deribit’s risk management team.
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Warnings by reputable liquidity providers are taken seriously and continuously monitored by support personnel. If a member of Deribit’s risk management team agrees with the liquidity provider, they will turn off the relevant index constituents.
Inclusion and exclusion procedure
One of the crucial steps in listing new instruments is establishing the index. Deribit has the following requirements for a spot pair to qualify as an index constituent.
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An index constituent needs to be liquid, available 24/7 and from a reputable exchange. The level of liquidity required is assessed at the discretion of Deribit’s risk management team. The market cap of the currency and the types of derivatives listed on the index are considered when judging liquidity.
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If Deribit's own spot market is liquid enough, it is included in the index to be resilient against connectivity loss.
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Deribit only lists a new underlying if there are multiple sources and these sources are liquid enough. The larger the market, the more index constituents Deribit includes. For example, the BTC/USD and ETH/USD indices typically have five or more constituents.
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Deribit does not include as an index for settlement any indices published by the issuer.
Settlement
Deribit settles derivatives on the 30-minute TWAP of the underlying index. To manipulate the settlement price, this would require the bad actor to:
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Buy or sell enough on a major cryptocurrency exchange to move the price.
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Keep doing this for long enough to influence the TWAP significantly.
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Repeat this on at least one other major cryptocurrency exchange (as Deribit uses the median price and major indices always have at least three sources).
Another attack by a bad actor could be to block our connectivity to the index constituents. This risk is covered by the same infosec measures Deribit has in place to prevent things like DDoS attacks.
In the unlikely event that Deribit loses connectivity to enough index sources that there are no sources available, the market is halted. If Deribit halts during settlement, Deribit will manually settle on the correct index as soon as possible.