🔻Liquidation

Introduction

Liquidation Price is a crucial metric that indicates the threshold at which your trading position becomes vulnerable to liquidation in the market. It's contingent on whether you are in a long or short position.

▶️ Long Position (Buying)

If you are in a long position, which means you are buying an asset like SNV, your Liquidation Price will always be lower than the buying average. This is because, in a long position, you incur losses as the market price decreases. If the market price touches or falls below your Liquidation Price, your position will be liquidated, and any existing losses will be realized.

As an illustration, suppose you possess a buying power of 100 WETH, and you've acquired 1 SNV at a rate of 20 WETH, with the intention of capitalizing on potential gains as SNV's price increases.

In this scenario, your Liquidation Price is 10.66 WETH, which is positioned below the present market price.

In practical terms, this means that if SNV's market price falls to or below 10.66 WETH, your position would be liquidated, realizing any existing losses.

▶️ Short Position (Selling):

Conversely, if you are in a short position, which means you are selling an asset like SNV, your Liquidation Price will be higher than the current market price. In a short position, you profit when the market price falls but incur losses if it rises.

As an example, suppose you possess a buying power of 100 WETH. If you've engaged in selling SNV at a rate of 20 WETH, you'll realize a profit when you repurchase SNV at a reduced price, such as 8 or 9 WETH.

However, you'll encounter losses if the market price surges to 21 WETH. In this context, the pivotal Liquidation Price is determined at 28.23 WETH, and it signifies the threshold at which your short position would be subject to liquidation.

In summary, the Liquidation Price is the specific market price level at which your trading position is at risk of being liquidated, depending on whether you are in a long or short position.

Liquidation Trigger/Process

Supernova's liquidation process is triggered when a trader's Margin Ratio (MR) falls below the Maintenance Margin Fraction (MMF), currently set at 0.0625. When this occurs, the trader's position is liquidated by a third-party liquidator bot.

The liquidation price for each position is calculated based on the position size and the amount of escrowed funds. The liquidation penalty is deducted from the trader's margin, with 80% directed toward the protocol and the remaining 20% allocated to the liquidator based on the remaining margin balance.

Liquidation Price

Liquidation Price can be calculated for each position based on position size and amount.

For Longs,

$LiquidationPrice =$

$(| EscrowedAmount - InitialPositionValue|)/((1-MMF)*Quantity))$

For Shorts,

$LiquidationPrice =$

$(| EscrowedAmount + InitialPositionValue|)/((1+MMF)*Quantity))$

Where$EscrowedAmount$ tracks the Deposited/Withdrawn balance.

Liquidation Penalty

The liquidation penalty is deducted from the trader's margin, with 80% directed toward the protocol and the remaining 20% allocated to the liquidator based on the remaining margin balance.

Example

Suppose a trader named Alex deposits 100 WETH and opens a short position of 100 SNV at an opening price of 10 WETH.

Alex's initial Margin Ratio is 0.1 since the position's initial value is 1000 WETH and the collateral held in escrow is 100 WETH.

This is above the MMF of 0.0625, so Alex's position is initially safe.

However, if the market price of SNV changes to 10.36 WETH, Alex's position is now worth 1036 WETH, and his escrowed funds of 64 WETH now only cover 61.77% of the position's value.

Therefore, Alex's Margin Ratio has fallen to 0.0617, which is below the MMF. At this point, Alex's position will be liquidated.

The liquidation price for Alex's position is calculated as follows:

$LiquidationPrice =$

$(|EscrowedAmount + PositionValueAtOpen|) / ((1 + MMF) * PosSize)$

(|100 + (1000)|) / ((1 + 0.0625) * 100) = 10.3529 WETH. This means Alex's position will be liquidated once the price hits 10.3529 WETH. The liquidation penalty will be 64.71 WETH, with 51.76 WETH going to the protocol and 12.94 WETH going to the liquidator.

Liquidator Bot

The Liquidator Bot is an open-source tool that anyone can run. It utilizes an in-house liquidation suite to retrieve liquidatable accounts from the subgraph and performs liquidations through API routes in the order processor, making the process efficient and streamlined.