Liquidations

Liquidations are a critical component of risk management on any perpetual DEX, and it is no different with Dexodus. In this section, we will outline the liquidation mechanism, conditions to trigger liquidations, and collateral management requirements for maintaining positions.

Liquidation Mechanism

The Liquidation mechanism ensures that the protocol remains solvent and that positions are appropriately managed to prevent excessive risk in the system. When a users position falls below the required maintenance margin, the liquidation process is triggered to mitigate the potential losses to the protocol and the other participants in the Dexodus ecosystem; this includes LPs and other Traders.

Liquidations occur under specific conditions designed to protect the protocol and its users:

• Insufficient Margin

  • If a trader’s collateral falls below the required maintenance margin due to price moving in a direction they did not anticipate, their position approaches at risk of liquidation. Maintenance margin is a majority portion of the collateral that users enter their position with, and if their losses on their total position reaches a specific threshold without triggering a stop loss, then the entire position is at risk of entering the liquidation queue and being margin called.

• Excessive Leverage

  • Positions with high leverage are more likely to be liquidated. With higher leverage, price movements have a more pronounced effect on the position. This can be beneficial if the price moves in the direction the Trader took their trade from, but that also means that losses can approach the collateral submitted on the trade much easier as well – thus triggering a margin call and liquidating the position. If a position has excessive leverage, the position may be closed out or liquidated to prevent further losses.

• Funding Rate Payments

  • Funding payments can erode margin over time. When positions are held for long periods of time, if funding continues to chip away at the margin committed to the position, which also reduces the maintenance margin and bring the stop loss closer to the entry price, increasing risk of liquidation.

The liquidation process on Dexodus is built in the smart contracts to mimic the process on centralized exchanges very closely, but with one notable change in the distribution of liquidated assets to fit with the decentralized nature of Dexodus coherently.

• Margin Call

  • A margin call is traditionally something that happens to inform users that their position has been liquidated due to having insufficient margin to keep their position active. In crypto centralized exchanges, margin calls automate the process of liquidating a position, and it is no different with Dexodus. With a focus on security and solvency, Dexodus employs a proprietary liquidation engine that ensures good risk management from users is rewarded, and LPs and the protocol remain solvent.

• Distribution of Liquidated Assets

  • When a position is liquidated, the collateral from the position is distributed back to the LPs, less the Taker fee that is applied on all automatically closed positions.