Volatility Smoothing Algorithms

Volatility Smoothing Algorithms are mathematical techniques used to dampen the effect of sudden, extreme price spikes on the mark price. These algorithms typically use moving averages or exponential decay models to filter out transient price noise.

By "smoothing" the price, the protocol ensures that liquidations are triggered by genuine, sustained trends rather than temporary market wicks or liquidity gaps. This protects traders from being unfairly liquidated due to momentary, artificial volatility.

While this adds a slight lag to the price discovery, the benefit in stability and fairness is significant. It is a critical component of risk management in high-leverage environments.

The choice of smoothing parameters is a constant balancing act between responsiveness and protection.