Liquidation

The protocol allows following types of liquidation to prevent systematic risk:

• Partial Liquidation

• Full Liquidation

Partial Liquidation

This type of liquidation is initiated for active positions which are in profit to minimize risk for market skew and for positions which are in loss to minimize isolated risk for the position. This enables the protocol to mitigate systematic risk such as missed liquidations or an over-leveraged position which may affect the market negatively. This is handled via ADL Engine which may take hold of the position once it reaches the maximum risk factors defined in market, asset or position.

Let us define the PnL factor for a position in profit, $F_{PnL}$ using PnL, $A_p$ for the position as

$$F_{\text{PnL}} = \frac{A_p}{P_s}, \quad A_p > 0$$

Since $P_S$ is a constant, hence the relation can be established as

$$F_{\text{PnL}} \propto A_p \quad \text{or} \quad F_{\text{PnL}} = \partial A_p, \quad \partial = \frac{1}{P_S}, \quad 0 < \partial < 1$$

For any position, we already defined leverage as $L_P$ as

$$L_P = \frac{P_s}{C_p}$$

We already know that for the positions in profit after fees for reference,

$$L_P = \frac{P_s}{C_p + \text{Profit}}$$

And for positions in loss after fees,

$$L_P = \frac{P_s}{C_p - \text{Loss}}$$

This can be plotted as

Considering a 10 USD collateral with maximum leverage of 10X

If a partial liquidation occurs in any market, it will create an imbalance in that market’s Open Interest which will be balanced by the funding fees skew in subsequent topic. This method of liquidation is often only applicable to the positions with leverage under maximum defined leverage and may pay out profit or left-over collateral.

Full Liquidation

When the position’s margin falls the factor defined by the market, it is added in the monitoring queue for the liquidator to execute liquidation of the position. Hence when,

$$M_P< M+F_L$$

where $F_L$ is the liquidator fees which is a fixed value in USD. In this method type of liquidation, the position is taken over by the protocol’s liquidator and closed with a loss for the traders and as a gain for the market. This is applicable to all positions having leverage above maximum starting leverage defined by the market or at the price when $M + F_L$ is less than $M_P$, the position’s margin is under minimum required maintenance margin, which is triggered first.