The Basics of Liquidation

Liquidation occurs when the Margin Balance falls below the Maintenance Margin.

  • Margin Balance consists of your account balance, unrealized Profit and Loss (PnL), and any pending funding fees.

  • Maintenance Margin is the required amount you need to keep in your account to maintain your futures positions.

  • Liquidation is triggered at the mark price, which reflects the estimated true value of a contract. The mark price accounts for an asset's fair value, helping to prevent unnecessary liquidations in volatile market conditions.

Liquidation Process

  1. To minimize the risk of liquidation, Foundation implements Risk Limits which mandate higher margin levels for larger position sizes. This is done to ensure that a user's position size aligns with the appropriate Risk Limit. In case a user approaches a Risk Limit:

    • Any open orders they have may be cancelled.

    • A Fill-Or-Kill order is submitted for the difference between the current position size at the Risk Limit and the position size needed to meet the margin requirement. This helps in avoiding liquidation by quickly adjusting the position to a safer level.

  2. When executing liquidation:

    • If the position remains in liquidation, it's taken over by the liquidation engine.

    • A stop-limit order is then placed, with the stop price set at the liquidation price and the limit price at the bankruptcy price, to close the position.

  • The liquidation price is the threshold at which a position begins to enter liquidation, influenced by factors such as the leverage applied, the maintenance margin rate, the current price of the cryptocurrency, and the trader's remaining account balance.

  • The bankruptcy price is the point where a trader's losses match their initial margin, effectively reducing the margin balance of the liquidated user to zero.

  • When an account undergoes liquidation, a penalty is applied, potentially up to the account's entire value, which is then transferred to the Insurance Fund. However, the liquidation engine strives to retain some funds in the account, aiming to leave accounts with a positive balance after the imposition of the Maximum Liquidation Penalty, which is set at 1.5%.

  1. In the scenario where the liquidation engine is unable to liquidate a position at the bankruptcy price:

    • The engine will use the Insurance Funds to aggressively engage in the market with the goal of closing the position.

    • If the position remains unclosed despite these measures, it will trigger an Auto-Deleveraging event.

Insurance Fund

To ensure the platform's financial stability, we have set up a separate USDC Insurance Fund. This fund is designed to cover any deficits when an account becomes bankrupt. It will initially receive funding from the core team and will later be sustained by allocating a percentage of the proceeds from liquidation processes.


Auto-Deleveraging (ADL) is a critical measure employed only when the Insurance Fund is unable to absorb the positions of a bankrupt client. Our Liquidation Engine implements various strategies, including Immediate or Cancel (IoC) orders, to minimize the frequency and impact of ADL. However, given the inherent volatility of crypto markets and the high leverage offered, completely avoiding auto-deleverage liquidations is not always possible. We are committed to reducing the occurrence of such liquidations to the bare minimum, enhancing user experience.

In the event of ADL:

  1. Affected users are promptly notified.

  2. Trader positions are ranked for liquidation priority based on profit and leverage. Those with higher profits and leverage are liquidated first. The ranking is determined by the "Leverage PnL" ratio, which is the Unrealized PnL relative to collateral, adjusted by the margin ratio.

  3. If liquidation happens, traders receive notification detailing the amount and liquidation price. Their positions are closed at the bankruptcy price of the initially liquidated order, and any open orders are canceled.

  4. After the completion of the liquidation process, traders are free to re-enter the market immediately.

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