Liquidations
A liquidation occurs when the market moves heavily against your position, causing your collateral to become insufficient.
The Mechanics of Liquidation
When you trade with leverage, you are borrowing synthetic buying power. To maintain the health of the protocol, your position must always be backed by a minimum percentage of margin, known as the Maintenance Margin Fraction.
If the price of SOL moves against you (e.g., you went Long but the price dropped), your position incurs unrealized losses. These losses are subtracted from your initial margin.
If your remaining margin falls below the maintenance threshold, the smart contract will automatically liquidate your position. The position is closed at the current market price, and a portion of your remaining collateral is added to the Insurance Fund to protect the protocol against bad debt.
Liquidation Example
- You open a Long position with 1 SOL margin at 10x leverage (Position size: 10 SOL).
- SOL is currently at $150.
- If SOL drops by 10% to $135, your position loses 10% of its value (1 SOL loss).
- Since your initial margin was only 1 SOL, your margin is now totally depleted!
- To prevent the position from going negative (which would bankrupt the protocol), the protocol liquidates the position before it hits -10%. Watch your Est. Liq. Price closely!