Introduction

Risk Management is the backbone of the Arkis ecosystem, safeguarding liquidity provider capital and ensuring a resilient, transparent environment for leveraged trading. Arkis has designed its risk management framework around three interdependent components that work seamlessly together:

1. Compliance Manager (On-Chain): The Compliance Manager is responsible for enforcing protocol rules and ensuring that all on-chain operations adhere to predefined guidelines. Operating directly on-chain, it monitors transactions, validates that Asset Managers and Liquidity Providers engage only with whitelisted tokens and protocols, and enforces strict compliance measures. This layer acts as the first line of defense, ensuring that only authorized and validated operations occur within the ecosystem.

2. Margin Engine (Off-Chain): Operating off-chain, the Margin Engine is the computational core that continuously evaluates the health of each Margin Account. It aggregates real-time data across various positions and computes risk metrics—most notably, the Risk Factor, which is derived from the stress-tested value of collateral relative to the borrowed amount. The Margin Engine is designed for low-latency, high-performance risk assessment and is responsible for issuing margin calls, calculating borrowing capacity, and formulating liquidation plans when the account’s risk parameters fall below acceptable thresholds.

3. Liquidation (On-Chain Execution Guided by the Margin Engine): Liquidation is the final, automated process that protects the system when a Margin Account becomes undercollateralized. While the Margin Engine generates detailed liquidation plan instructions off-chain, the actual execution takes place on-chain. Leveraging smart contract technology, the system liquidates positions via pre-approved protocols to recover funds and repay debt. This multi-step process ensures that, in adverse market conditions, the integrity of the overall system and the safety of liquidity provider capital are maintained.

Together, these three components form an integrated risk management framework that is both flexible and robust. The on-chain Compliance Manager ensures that operations start on a solid foundation of security and protocol adherence. The off-chain Margin Engine continuously monitors and analyzes every Margin Account, dynamically recalculating risk exposures and triggering alerts or remedial measures when needed. Finally, the on-chain Liquidation process—guided by the Margin Engine—executes predetermined plans to unwind positions and restore balance when risk thresholds are exceeded.

In the following sections, we will delve deeper into the Margin Engine, exploring its methodologies, real-time risk computations, and its critical role in initiating liquidation. This in-depth review will illuminate how Arkis maintains a secure, dynamic environment, allowing Asset Managers to trade with efficiency while protecting the capital of Liquidity Providers.