Liquidation Mechanism
Partial Liquidation First
When a position breaches maintenance margin:
Step 1: Partial Reduction
Position is reduced proportionally
Goal: Restore account to safe margin levels
Minimizes capital loss for trader
Prevents unnecessary full liquidations
Step 2: Full Liquidation (If Needed) Only if partial liquidation insufficient:
Entire position closed
Liquidation penalty applied
Insurance fund covers any shortfall
Liquidation Penalty Calibrated to:
Prevent predatory liquidations
Discourage excessive leverage
Ensure liquidators have incentive
Maintain system health
Insurance & Backstop Mechanisms
Insurance Fund
Protocol-owned reserve funded by liquidation penalties
Covers losses when liquidations occur below maintenance margin
Transparent balance published on-chain
Backstop Auction In extreme scenarios where insurance is insufficient:
Position auctioned to liquidators
Dutch auction format (price decreases over time)
Ensures orderly liquidation even in illiquid conditions
Protects against cascading failures
Social Loss Distribution Last resort if all backstops exhausted:
Losses distributed proportionally across profitable traders
Transparent and verifiable process
Historical precedent from successful exchanges
Liquidation Example
Scenario: Trader has 10 ETH-PERP long at $3,000 (30,000 USD position)
Initial margin: 10% ($3,000)
Maintenance margin: 5% ($1,500)
Current collateral: $2,000
ETH drops to $2,900:
Position value: $29,000
Margin requirement: $1,450 (still safe ✅)
ETH drops to $2,800:
Position value: $28,000
Margin requirement: $1,400
Liquidation triggered ⚠️
Partial Liquidation:
5 ETH-PERP closed at $2,800 = $14,000 reduction
Remaining position: 5 ETH-PERP long
New position value: $14,000
Margin requirement: $700
Current collateral: $2,000 - loss
Account restored to health ✅
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