Liquidation
In the event of liquidation, only 50% of the available collateral + liquidation fees are used by the lending protocol to repay the debt.
The liquidation of a position represents the most unfavorable outcome for a trader. Several factors can lead to liquidation, which we enumerate below:
Adverse price fluctuations of the coin relative to the transaction's direction, potentially resulting in the forced closure of the position by the protocol.
Changes in financing rates - In times of market turbulence, lending rates may soar, ultimately provoking the liquidation of the transaction. Partial protection is attainable by selecting a fixed financing rate. However, in theory, liquidation can still occur if the transaction remains in the market for an extended period. In other words, if the coin's value remains stagnant, the transaction will incur losses due to financing rates.
Liquidation due to asset price change
Liquidation Price = (Total Value Borrowed / MaxLiquidationLimit / PositionSize) × AssetPrice
Such liquidation occur when the lending protocol liquidates the loan.
For example, suppose we open a position of 1 ETH in size, using DAI as a collateral currency and with x5 leverage.
The price of 1 ETH at the moment of order execution is $2000, Max Liquidation Limit is 86%, Max Collateral Factor is 75%, and the DAI price is at $1.
In order to calculate the liquidation price, we'd need to first calculate the amount of borrowed funds.
The amount of borrowed funds (in DAI) would be calculated using the following formula:
Now we can calculate the total value of borrowed funds by multplying this amount by the current DAI market price:
Now, in order to calculate the liquidation price, we simply divide the total value of borrowed funds by the current Max Liquidation Limit and by the Position Size and multiply that amount by the current ETH market price:
Liquidation process
If the trader's position becomes eligible for liquidation (in other words, undercollateralized), protocol have the right to liquidate user's loan in order to repay the debt.
Currently, as we utilize AAVE and Compound lending protocols, liquidation happens in accordance with these procols' rules.
In other words, in the event of liquidaion, up to 50% of the trader's personal funds included in the position (margin) + liquidation fees is taken to repay the debt. All the amount that's left is being returned to the trader's wallet.
For more details regarding liquidation and liquidation fees, please refer to the liquidation rules for specific protocol: AAVE, Compound.
Liquidation fees, as well as liquidation rules may be changed by the protocol, thus we recommend to review the aforementioned articles periodically in order to be aware of any changes implemented.
Liquidation prices
A position can be liquidated in both cases: if the asset's market price goes against the direction of the position or if the collateral's market price deviates from its open price.
It is worth noting, that on the trade interface there will be reflected 2 liquidation prices.
As, due to the specifics of lending protocols, all the positions are basically backed up by the amount of cryptocurrency lended into the protocol applied during trade execution, liquidation may occur in two cases: either your trade asset's market price is going against your position or your margin collateral's price deviates too much from its market price when the position was opened.
Both liquidation prices would be reflected in the corresponding column on the 'Open Positions' section of the trade module:
Claiming remaining margin
After the liquidation process of a position had been completed, a certain amount of margin would be returned to the trader and can be claiming directly from the app interface.
In order to claim the remaining margin amount, simply click on the 'Wallet' icon in the top-right corner of the web-page and choose 'Claim' from the drop-down menu:
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