Liquidation

What is Liquidation?

Liquidation in an exchange is the process of closing a trader's leveraged position when the margin in their account is insufficient to cover potential losses. It acts as a risk management measure to protect both the exchange and other traders from excessive losses caused by price fluctuations.

Why Liquidate our users?

Liquidation helps maintain a healthy trading ecosystem by preventing traders from taking on excessive risk and ensuring that the exchange can fulfill its financial obligations to all users.

Liquidation Prices

The liquidation price is the specific price level at which a leveraged position becomes subject to automatic closure to prevent further losses. When trading with leverage, a trader is required to maintain a certain level of margin in their account, which is a percentage of the total position value. The liquidation price is determined by the initial margin and maintenance margin requirements, as well as the size and direction of the position.

If the price of the underlying asset moves against the trader's position and reaches the liquidation price, the exchange will automatically close (liquidate) the position. This action is taken to protect the exchange and other traders from excessive losses and ensure that the trader's account has enough collateral to cover potential losses.

Traders should always be aware of their liquidation price and monitor their margin levels to manage risk and prevent involuntary liquidations.

Liquidation Price changes

The liquidation price of a trade can shift over time, influenced by funding fees. When funding fees are positive, the liquidation price may move closer to liquidation price; if funding fees are negative, your liquidation price gets further away from to liquidation price if the benefit exceeds the funding fees. The formula for calculating the distance to the liquidation price is:

Distance to Liquidation Price = Open_Price * (collateral * 0.9 - funding_fee) / collateral / leverage_multiple.

Example

Assume you open a long position on ETH/USD at 2,000 USD with 200x leverage and 100 DAI collateral. If you've earned 1 DAI in funding fees, the liquidation price calculation would be:

Liquidation Price = 2,000 - 2,000 * (100 * 0.9 - (-1)) / 100 / 200 = 1,990.95 USD.