Liquidations

A liquidation occurs when a trader’s position moves against them and their account equity falls below the required maintenance margin.

Maintenance margin is the minimum amount of collateral required to keep a position open. It is typically lower than the initial margin required to open the trade, and the exact requirement depends on the asset and its maximum leverage.

If account equity drops below maintenance margin, the platform will attempt to reduce or close the position to prevent further losses.

What happens during a liquidation

When a position becomes liquidatable, the system typically follows a two-step process:

1) Market liquidation attempt

The platform first attempts to close the position (fully or partially) by submitting market orders to the order book.

• The order may fill fully or partially depending on available liquidity

• If enough of the position is closed to restore margin requirements, the position remains open (if partially reduced)

• Any remaining collateral stays with the trader

This approach is designed to close positions through normal market execution whenever possible.

2) Backstop liquidation

If the position cannot be liquidated through the order book and the account deteriorates further, a backstop liquidation may occur.

In a backstop liquidation, the position (and the associated collateral for that margin type) is transferred to a designated liquidation mechanism, such as a protocol or community-backed liquidator vault.

This is used as a failsafe to ensure the system remains solvent during fast markets or poor liquidity conditions.

Cross margin vs. isolated margin liquidations

1) Cross margin liquidation

For cross margin positions, liquidation can affect the trader’s shared collateral balance.

If a cross position is backstop liquidated, the trader’s cross positions and cross collateral may be transferred as part of the liquidation process. In practice, this can result in the trader losing most or all of their cross margin equity.

2) Isolated margin liquidation

For isolated margin positions, only the isolated position and its isolated collateral are affected.

The trader’s cross margin balance and other positions remain untouched.

Why some margin may not be returned in backstop liquidation

During a backstop liquidation, some or all of the maintenance margin may not be returned to the trader.

This is because the backstop liquidator needs a buffer to absorb risk and execute liquidations safely, especially in volatile conditions. That buffer helps ensure the liquidation system remains reliable over time.

To reduce liquidation risk, traders should consider:

• Using lower leverage

• Monitoring margin levels closely

• Setting stop-loss orders

• Closing or reducing positions before liquidation thresholds are reached

Mark price and liquidations

Liquidations are generally triggered using a mark price, not the last traded price.

The mark price is designed to reflect a fair market value by combining market reference pricing and on-platform order book conditions. This helps reduce the chance of unfair liquidations caused by short-term price spikes or thin liquidity.

Important notes:

• In volatile markets, mark price may differ from the visible book price

• Highly leveraged positions are more sensitive to small mark price movements

• Traders should monitor liquidation thresholds using the platform’s mark price methodology

Partial liquidations

For larger positions, the platform may use partial liquidations instead of immediately closing the entire position.

This means only a portion of the position is liquidated at first, which can:

• Reduce market impact

• Give the trader a chance to recover margin requirements

• Improve execution quality in thinner markets

Some platforms also apply a short cooldown window after a partial liquidation, during which liquidation behavior may temporarily change (for example, forcing full-position liquidation if risk continues to worsen).