Liquidation is an important part of leveraged trading. When you open a leveraged position, you are effectively using collateral to borrow money from the exchange to buy an asset.
If the value of that asset goes down, your losses approach the value of your margin (i.e., your initial collateral). This puts the exchange at risk - a sudden price movement could result in your position being worth less than your collateral. If the value of your assets becomes dangerously close to the value of your collateral, the exchange will proactively liquidate your position to protect against losses.
A position will be fully liquidated if its margin ratio is less than the maintenance margin. Therefore, if the maintenance margin ratio is 2.5%.
To make trading safer and more fair, the Palmswap Protocol uses a partial liquidation scheme. As long as your asset to margin ratio is above 2.5%, only 25% of your position is liquidated, while the rest of your position remains intact with a margin ratio above the liquidation point.
Partial liquidation occurs when your margin ratio falls below 6.25%.
Full liquidation occurs when your position margin ratio falls to 2.5% or below. Under the assumption of on time liquidation, prior to full liquidation (below 6.25% margin ratio), 25% of the position's PnL will be realized and a corresponding portion of the position's principal and margin will be liquidated, leaving the remaining position unaffected.
- 1.The entry price of your 10x leveraged ETH position is $3,000, and its margin ratio is 10%. The ETH price drops to $2,880 the other day, your margin ratio is now 6%.
- 2.Since the margin ratio of your position is below 6.25%, a partial liquidation is suspended and a part of your position is hedged.
- 3.The remaining position remains unaffected as long as the margin ratio does not fall below 2.5%.
The liquidation is triggered by keeper bots. As a reward for providing this service, keepers receive 1.25% of the remaining notional value of the position.
Keepers are used with blockchains because smart contracts and blockchains are generally passive and cannot execute code without an external trigger. Keeper bots are a decentralized way to access this trigger (anyone can execute the bot).
After the flash crash on the perpetual protocol, changes were made in the calculation of the margin ratio. These have been extended and improved by us, besides the index price calculation we are currently still working on the protocol protection barrier in case of a severe flash crash.
Oracle-based calculation under difficult market conditions
To counteract the flash crash risk, liquidations , if the market price deviates more than 10% from the index price (Oracle price) , are valued based on the Oracle price. This measure provides an additional control against liquidation risk during a flash crash when the price on the perpetual protocol deviates significantly from spot prices.
Protocol lock (working on it)
The lock occurs when the market price deviates by 5% or more from the index price, this prevents further new positions in the negative direction, also liquidations are not performed until the market price is back within the lock. In this way, a more severe flash crash risk can be prevented.