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Liquidation Mechanism
2021-03-08 03:36

What is liquidation?

Margin is an important indicator of the risk of maintaining a position. When the margin is insufficient, your position will be liquidated.


Liquidation Mechanism

The liquidation mechanism of perpetual contracts is based on the mark price. When the margin is insufficient to trigger the liquidation mechanism, it will enter the liquidation process.


Liquidation Process

Fixed margin, cancel the position closing orderàclear position and margin

Cross margin, cancel the position opening orderàcancel position closing orderàself-transaction of long and short positionsàclear position, margin and balance


Liquidation-proof Mechanism

In order to avoid the behavior of controlling the order and causing losses to users due to liquidation, the platform uses the method of anchoring the spot index price to anchor the market instead of the platform price.

For example: current platform price for BTC/USDT is 4,000, the spot index price is 4,050, when you open a position, you have to make a deal with the platform price, but your profit and loss shall be calculated by the spot index price 4,050.

If at a certain moment, the price of the platform fluctuates to 3,700 due to some factor, and the spot index price is still 4,050, your profit and loss will still be calculated at 4050 and will not be affected by the fluctuation of the platform price.

But if you close the position at this moment, your transaction price will be 3,700, because the price must be traded with the counterparty in the platform during the transaction process.


Insurance Funds

When your position reaches the liquidation price, the system will automatically take over your position and automatically place an order at the best price in the market. The source of insurance funds mainly comes from the profit that the liquidation transaction price is greater than the bankruptcy price after the system liquidation takes over. When a liquidation user suffers a loss from extended margin call, the ADL mechanism will be activated. The prerequisite for the activation of the insurance funds is that when the ADL mechanism is activated and the profitable user loses, the insurance funds will compensate for this part of the loss.


Auto Deleveraging Mechanism

The system will rank users one by one according to the risk position and profitability. When a user who has liquidation losses also get a loss from extended margin call, the auto deleveraging mechanism will be activated. The user with the highest risk and the highest profit ranking will reduce the position.

When the position is profitable: rank = (index price – average price when open a position) / average price when open a position * index price / abs (index price – bankrupt price)

When the position is losing: rank = ( index price – average price when open a position) / average price when open a position /  index price * abs (index price – bankrupt price)

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