How Falcon Finance Manages Extreme Market Risks

The Volatility Problem

Cryptocurrencies are among the most volatile assets. They can surge 500% within a single day or collapse 90% within an hour.

Bitcoin showed this behavior in its early years, but over time its price swings have become less extreme. Most altcoins, however, remain notorious for violent moves. For example, MANTA recently fell by more than 90% in under an hour, causing massive liquidations and losses.

Falcon’s Approach to Extreme Events

Falcon Finance treats extreme events as first-order risks, using disciplined, multi-layered controls to minimize losses in both stressed and normal conditions.

At the core is a delta-neutral framework designed to reduce directional exposure while capturing basis and funding opportunities. Since Falcon accepts both stablecoins and non-stablecoins as collateral for USDf minting, and these asset classes behave very differently during volatility, we apply distinct delta-neutral strategies to each:

• With stablecoins: Falcon buys spot exposure in the target altcoin and stakes it when appropriate. We then open an offsetting short in the corresponding perpetual sized to the marked spot exposure.
• With non-stablecoins: Falcon sells the spot to neutralize risk and opens an offsetting long in the corresponding perpetual when basis or funding conditions make the trade attractive. This often generates strong profits when there are large differences between spot and perps or when funding rates are negative.

Risk Controls in Practice

During extreme events involving rapid price increases, liquidation risk rises drastically. To reduce exposure in such scenarios, Falcon Finance enforces the following safeguards:

• Unified monitoring: All strategies trading spot and perpetuals connect into a single system that enforces near-zero net delta across the total position.
• Automatic thresholds: When price exceeds a set level, systems automatically sell spot and close perpetual positions.
• Liquidity buffer: Even when staking yields are attractive, at least 20% of spot holdings remain on exchanges and available for immediate sale, allowing quick liquidation without delay.
• Flexible staking: In extreme events, Falcon removes spot coins from staking immediately or as soon as possible. We aim to negotiate zero lock-up periods for staking or any other DeFi activity.
• Predictive modeling: Machine learning models continuously analyze market data and flag potential extreme events early, allowing rapid intervention.
• Position limits: Falcon sets maximum altcoin position sizes so the majority of any position can be unwound within a day.
• Execution precision: During sharp spot declines, Falcon prioritizes management of perpetual positions to ensure they can be closed or resized quickly. This prevents adverse funding from accumulating. Execution algorithms, adapted from high-frequency trading, allow rapid order placement and cancellation, enabling efficient exits even in stressed markets.

Handling Stablecoin Depegs

Stablecoin depegging is treated as a distinct scenario. Falcon’s monitoring system detects abnormal peg deviations early, before broader market recognition. Depending on risk posture, Falcon either:

• Exits exposure quickly, keeping realized losses to only a few basis points before a full depeg develops, or
• Maintains a hedged stance and waits for the peg to restore.

Conclusion

Crypto volatility is extreme by nature. At Falcon Finance, we do not try to guess the timing of the next 500% surge or 90% collapse. Instead, we prepare for it. By treating extreme events as first-order risks and applying strict, systematic controls, Falcon stays resilient no matter what the market delivers.