Liquidations
Liquidation is the forced closure of a trader's positions when their account no longer meets minimum margin requirements. It is a critical safety mechanism that protects the solvency of the exchange and prevents losses from spilling over to other traders.
When Does Liquidation Occur?
A wallet's equity (total account value) is continuously evaluated against its total maintenance margin requirement. Equity changes as index prices move, independent of any trading activity. When a wallet's equity falls below its total maintenance margin requirement — meaning the margin ratio exceeds 1 — the wallet becomes eligible for liquidation.
Margin Ratio = Total Maintenance Margin Requirement / Equity
Liquidation occurs when: Margin Ratio > 1How Liquidation Works
When a wallet is liquidated, all open positions are closed at the close price. The close price is derived from the index price, adjusted by the maintenance margin fraction and the wallet's current margin ratio:
Close Price = Index Price ± Close Price Adjustment
Close Price Adjustment = Index Price × Maintenance Margin Fraction × (Equity / Total Maintenance Margin Requirement)The close price adjustment is subtracted for long positions and added for short positions. After liquidation, the wallet is left with zero quote balance and zero equity.
Profits and losses resulting from liquidation are absorbed by the insurance fund, a reserve maintained by the protocol to cover shortfalls from liquidated accounts.
Insurance Fund
The insurance fund is the primary backstop for maintaining system solvency. When an account is liquidated at a loss (i.e., the close price results in a deficit), the insurance fund absorbs the difference. The insurance fund is funded by liquidation profits — cases where liquidated positions close at a price favorable enough to generate surplus.
Auto-Deleveraging (ADL)
In the rare event that the insurance fund cannot absorb a liquidation loss, the system falls back to auto-deleveraging (ADL). During ADL, the positions of the liquidated wallet are closed directly against opposing positions held by other traders, at the close price.
ADL results in the same zero-collateral outcome for the liquidated wallet, but it also forcibly realizes unrealized PnL for the counterparty wallets whose positions are closed. This is an involuntary action — counterparties do not choose to participate.
ADL Counterparty Selection
When ADL is triggered, counterparty positions are selected based on an ADL score that favors positions with high leverage and high unrealized profit:
Multiple counterparty positions may be selected to fully offset a single liquidated position.
ADL Risk Indicator
Each open position reports an adlQuintile value (1 through 5) that indicates the estimated risk of being selected as an ADL counterparty at the current index price. A quintile of 1 indicates low risk, while 5 indicates the highest risk. Traders can monitor this value to assess and manage their ADL exposure.
After Liquidation
Liquidated wallets are not locked or restricted. A trader whose account has been liquidated may immediately deposit new funds and resume trading.
Avoiding Liquidation
To reduce the risk of liquidation:
Monitor your margin ratio — Keep it well below 1. The closer it is to 1, the closer you are to liquidation.
Use conservative leverage — Lower leverage means more collateral relative to your position, providing a larger buffer against adverse price moves.
Set stop-loss orders — Automatically close positions before they reach your liquidation price.
Manage position size — Larger positions require more margin. Consider the incremental margin requirements for positions that exceed a market's base position size.
Maintain excess free collateral — Having available collateral beyond your margin requirements provides a safety buffer.