Liquidation
Liquidation is a key part of leveraged trading. Here is a guide on how liquidation works.
​Perpetual futures are leveraged instruments meaning it allows you to open a leveraged position for a given amount of collateral. Leverage helps to magnify a position size using the same amount of collateral by borrowing additional funds. Leveraged trading amplifies both profits and losses and is highly risky.
For example, if you open a 2x leveraged long position using 100 USDC, your total initial position is worth 200 USDC and 100 USDC of that position's value is borrowed. The collateral of 100 USDC will be fully utilised if the underlying falls by 50%.
The liquidation mechanism is used to square off positions that are falling short of minimum margin requirements.
Margin is the amount of collateral posted while entering a trade.
A sudden price movement could put the exchange at risk as the losses could exceed the margin.
Therefore, the exchange imposes a minimum margin ratio requirement to help in liquidation during adverse market conditions.
Partial liquidation
To make trading safer and fairer, Polysynth only makes partial liquidations.
A maintenance margin ratio of 6.25% is used by Polysynth to trigger partial liquidation. If the margin ratio goes below 6.25%, 25% of the position size will be liquidated, leaving the rest of the position open and bringing the margin ratio back above the maintenance margin ratio requirement.
The maintenance margin is one of two types of margin required to make a leveraged trade. The maintenance margin is the minimum amount of collateral you must maintain to keep a leveraged position open. The other is the initial margin which is the deposit you use to place your trades. So, the initial margin opens your position, while the maintenance margin keeps your account funded and your position open.

Full liquidation

If the margin ratio falls below 2.5% the position will be fully liquidated. A liquidation penalty of 2.5% will be imposed where 1.25% goes to the liquidation bot and the remaining balance goes to the insurance fund.
In case the margin left after liquidation is less than 1.25%, the insurance fund will pay the remaining amount to the liquidation bot.

Example

Position Notional = $200
Collateral = $100
PnL = -$88
Funding Payment = 0
Margin Ratio = ($100 - $88)/$200 = 0.06 => Partial Liquidation Triggered (25% position to be liquidated)
Notional to be liquidated = $50
Liquidation Penalty (2.5%) = $50*0.025 = $1.25; $0.625 goes to liquidation bot, $0.625 to insurance fund
Loss realised = $88*0.25 = $22
Updated Margin = $100 - $22 - $1.25 = $76.75
Updated Margin Ratio = ($76.75 - ($88 - $22))/($200 - $50) = 7.17%
Mark Price is used for liquidation purposes. During severe market conditions, if the mark price diverges more than 10% from the index price (oracle price), liquidations will be evaluated based on oracle price.
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