Liquidations

A liquidation event occurs when a trader's positions move against them to the point where the account equity falls below the maintenance margin. The maintenance margin varies by asset. For Bitcoin perpetuals it is 50x (2% collateral requirement). For Solana and ethereum perpetuals it is 40x (2.5% collateral requirement).

Perpetuity has a two tiered liquidation system, with plans to offer a third tier after alpha.

1. Orderbook liquidations (not yet built): If there are standing orders in the book that could fill a liquidation, it is prioritized and filled.
2. Backstop Liquidations: If there is no limit order liquidations, the community fund inserts itself and handles the liquidation itself. The fund then systematically closes the position.
3. Auto-deleveraging: In extreme scenarios when a user is liquidated and the insurance fund for that asset is not adequately collateralized, users with profitable positions will be force closed in order to keep the solvency of the protocol.

Orderbook Liquidations

Overview

When a user's position needs to be liquidated (when their account equity falls below maintenance margin), the system will first check for standing orders in the orderbook that could fill the liquidation.

Special Order Type

Orderbook liquidations are treated as a special order type that gets priority in matching. This means that when a liquidation order is placed, it will be matched against existing limit orders in the book before any other orders.

Fee Structure

The fee structure is designed to incentivize market makers to provide liquidity for liquidations:

Benefits

This mechanism encourages market makers to place standing orders that can absorb liquidations because:

1. Fee Earnings: Users can earn up to 80% of the liquidation fee based off the spread from the mark price
2. Priority Matching: Users get priority matching for these orders