Liquidations
A liquidation is a critical risk management event that occurs when a trader's position incurs enough losses that their margin balance can no longer support it. SoDEX employs a streamlined and decisive liquidation process designed for efficiency and transparency.
The SoDEX Liquidation Process
SoDEX utilizes a direct takeover model for liquidations, ensuring speed and market stability by bypassing multi-stage closures or placing market orders for the user. This process is decisive and immediate:
Trigger Condition: A liquidation is triggered the moment a user's margin for a position falls to the Minimum Maintenance Margin Rate. This rate is a predetermined percentage of the position's notional value and represents the absolute minimum collateral required to keep the position open.
Execution: Once the trigger condition is met, a liquidator instantly and automatically takes full control of the user's entire position and all of its remaining margin (collateral). The user's account for that specific position is effectively zeroed out, and the position is transferred to the liquidator's control.
This direct takeover mechanism ensures that under-collateralized positions are handled swiftly, protecting the stability of the market. There are no liquidation fees charged to the user, the process is a complete transfer of the position and its remaining collateral.
Computing Liquidation Price
The liquidation price displayed when entering or holding a position is an estimate. Several factors can cause the actual liquidation price to differ from this estimate.
For Open Positions: The shown liquidation price is calculated based on your entry price. However, it remains subject to change due to factors such as funding payments or, for cross margin positions, fluctuations in the unrealized PnL of other open positions.
Key Dependencies:
Cross Margin: The actual liquidation price for a cross margin position is independent of the leverage you initially set. Lower leverage simply means more collateral is locked, but the liquidation price is determined by the overall health of your entire portfolio.
Isolated Margin: For an isolated position, the liquidation price is directly dependent on the allocated margin, which is determined by your chosen leverage.
The Formula: The precise liquidation price is calculated as follows:
Where:
l = 1 / MAINTENANCE_LEVERAGE (Varies by margin tier).
side = 1 for Long positions; side = -1 for Short positions.
margin_available calculation differs between cross and isolated modes.
The calculation may be iterative since MAINTENANCE_LEVERAGE can change with notional value.
Liquidation Example
To understand the process, consider the following scenario:
Initial Setup: A trader opens a long position with 25× leverage, using $200 of margin, giving a total notional value of $5,000.
Initial Margin Requirement: The initial margin rate is 4%.
Maintenance Margin Requirement: The minimum maintenance margin rate is set at 50% of the initial margin rate, i.e., 2% of the notional position value.
Liquidation Threshold: The minimum margin required to maintain the position is therefore $5,000 × 2% = $100.
Now, assume the market moves against the trader:
Market Movement: The asset price decreases by 2%, leading to an unrealized loss of $5,000 × 2% = $100.
Margin Reduction: The initial margin of $200 is reduced by the $100 loss, leaving $100 in remaining margin.
Liquidation Trigger: The remaining margin of $100 reaches the maintenance margin threshold, triggering liquidation.
Position Takeover: At this point, a liquidator assumes full control of the $5,000 position and the remaining $100 margin. The trader is subsequently closed out of the position.
Risk Management
Liquidation results in the total loss of allocated margin. Traders are strongly advised to use Stop Loss orders proactively to exit a position before it reaches the liquidation threshold.
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