Liquidations

Overview

Our perpetual futures exchange implements a robust multi-tier liquidation and loss mitigation system. This system is designed to handle underwater positions effectively while minimizing the impact on healthy traders. A liquidator is free to sell on the book or keep the liquidated size. There is a natural incentive to sell the liquidated size on the book if the book price is better than liquidation price.

The mitigation strategy consists of a progressive cascade of three layers:

• Insurance Fund Coverage

• Socialized Losses

• Auto-Deleveraging (ADL)

A position enters liquidation when its margin falls below the maintenance margin requirement. This can occur due to:

• Price Movement: Index prices move against the user, causing unrealized PnL to erode the margin.

• Funding Payments: Continuous funding payments reduce the collateral balance if the account is on the paying side of the funding rate.

Withdrawing collateral and placing orders are prevented by the system if they would breach initial margin requirements, so these actions cannot trigger a liquidation themselves.

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Mark Price

To prevent market manipulation (such as "wicking" on a single exchange), we use Mark Price rather than the spot Index Price to determine liquidation triggers. Where:

$${\small \begin{align*} \small & MarkPrice = median(BookPrice, FundingPrice, TwapPrice) \\ &FundingPrice = IndexPrice + \text{TWA}_{1m,1h}(BookPrice - IndexPrice) \cdot \frac{\text{Time to next Funding}}{ \text{Funding Period}} \\ &TwapPrice = IndexPrice + \text{TWA}_{5s,5m}(BookPrice - IndexPrice) \end{align*} }$$

(See the Funding chapter for the detailed definition of TWAs.)

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Liquidation Process

Our system is permissionless, allowing any participant to liquidate underwater positions. The process prioritizes position health over total closure.

Partial Liquidations

Unlike full position closures, we only liquidate the minimum amount necessary to restore the position to a healthy state.

• Target: The position is reduced until it returns to the market's maximum initial leverage (e.g., restoring a 50x position back to 10x).

• Liquidator Role: Liquidators acquire the liquidated portion immediately at Mark Price. They can choose to close it immediately or hold it based on their strategy.

Liquidation Fees

Three fees are charged during a liquidation event to incentivize keepers and protect the protocol. These are configurable by the market admin:

Fee Type	Recipient	Description
Liquidation Fee	Liquidator	Incentive for performing the liquidation.
Force Cancel Fee	Liquidator	Charged if the liquidated position had pending orders. It is a % of the canceled size, typically an order of magnitude smaller than the Liquidation Fee.
Insurance Fund Fee	Insurance Fund	A smaller fee that flows directly into the market's isolated insurance fund.

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System Safety & Bad Debt

If liquidations cannot occur fast enough and a position falls below its bankruptcy price (generating bad debt), the system resolves this through a progressive cascade of three safety layers.

1

Layer 1: Insurance Fund

This is the first line of defense.

• Structure: Each market maintains its own isolated insurance fund.

• Source: Funded by the Insurance Fund Fee collected during healthy liquidations.

• Impact: If the bad debt can be covered by this fund, no other traders are affected.

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Layer 2: Socialized Losses

If the insurance fund is depleted but bad debt is within defined thresholds, losses are socialized.

• Mechanism: Losses are distributed proportionally among all positions on the opposite side of the market.

• Settlement: The bad debt amount is added to the funding rates of opposing positions and settled when those positions trigger a funding update.

• Safety: Thresholds ensure that a healthy position cannot take on so much socialized debt that it becomes liquidatable itself.

3

Layer 3: Auto-Deleveraging (ADL)

As a final measure for extreme scenarios (e.g., suspected manipulation or massive insolvency), the system triggers Auto-Deleveraging (ADL).

• Mechanism: Highly profitable positions on the opposing side are automatically closed against the underwater position at the bankruptcy price.

• Why ADL? It is considered more equitable to close specific, highly profitable positions rather than socializing massive losses across the entire market.

• Permissioned Model: ADL is executed by the market admin to allow for judgment in complex edge cases, though the results are verifiable on-chain.

Note: The market admin can trigger ADL at any moment, even if socialized losses are an option, to ensure market health.

For full details, see the ADL documentation.