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Understanding Liquidation

Automatic Protection
Liquidation automatically closes leveraged positions when market prices reach calculated liquidation thresholds, preventing unlimited losses and protecting system stability. System Stability
This process ensures that borrowed capital is protected while giving traders maximum flexibility within safe risk parameters. Continuous Monitoring
The system monitors all leveraged positions in real-time, calculating liquidation triggers based on current market conditions and position parameters.

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Liquidation Process

1

Price Monitoring

System continuously monitors market prices against your position’s liquidation threshold.
2

Liquidation Trigger

When market price reaches liquidation price, the system initiates automatic position closure.
3

Order Optimization

System accumulates bid orders and calculates optimal execution price to minimize market impact.
4

Position Closure

Position is automatically closed and settlements are processed through the leverage vault.

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Liquidation Price Formula

The liquidation price is calculated using this comprehensive formula: 
liquidation_price = entry_price × (1 - total_protection / total_position_value)
Formula Components:
  • Entry Price: Your original position entry price
  • Total Protection: Sum of fluctuation guard + initial margin + insurance collateral
  • Total Position Value: Initial margin × leverage ratio
Variable Definitions:
  • fluctuation_pct: Fluctuation guard percentage (default: 0%)
  • leverage_balance: Available leverage balance for protection
  • initial_margin: Your deposited margin for the position
  • insurance_collateral: Locked collateral for market protection
  • leverage_ratio: Your chosen leverage multiplier

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Detailed Example

Let’s walk through a complete liquidation calculation: Position Parameters:
  • Entry price: 80¢
  • Fluctuation guard: 0% (default)
  • Leverage balance: 100 USD
  • Initial margin: 100 USD
  • Insurance collateral: 50 USD
  • Leverage ratio: 5x
Step-by-Step Calculation:
  1. Calculate Total Protection: 
    Total Protection = (0% × 100 USD) + 100 USD + 50 USD = 150 USD
  2. Calculate Total Position Value: 
    Total Position Value = 100 USD × 5 = 500 USD
  3. Calculate Protection Ratio: 
    Protection Ratio = 150 USD ÷ 500 USD = 0.30 (30%)
  4. Calculate Liquidation Price: 
    Liquidation Price = 80¢ × (1 - 0.30) = 80¢ × 0.70 = 56¢
Result: This position would be liquidated if the market price drops to 56¢.
Liquidation price calculations may be updated to improve system efficiency. All changes will be announced in advance with detailed explanations.

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Liquidation Optimization

Off-Chain Optimization
In some cases, liquidations are processed through Flipr’s optimization system rather than appearing as on-chain transactions. This improves execution and reduces spread losses. Bid Order Pricing
When using the optimization system, liquidation prices are calculated using volume-weighted average pricing across available bid levels: 
marked_bid_price = Σ(bid_price × bid_volume) / Σ(bid_volume)
Example Optimization: For a 1,000 share liquidation with these bid levels:
  • Level 1: 500 shares @ 95¢
  • Level 2: 300 shares @ 94¢
  • Level 3: 200 shares @ 93¢
Calculation: 
marked_bid_price = (500 × 95¢ + 300 × 94¢ + 200 × 93¢) ÷ 1,000 = 94.3¢
Transparency Guarantee
All entry orders remain on-chain for complete transparency. Only liquidation executions may be optimized off-chain for better pricing.

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Risk Management

Preventing Liquidation
  • Monitor liquidation levels closely in volatile markets
  • Use fluctuation guard for additional protection
  • Implement stop-loss orders before reaching liquidation
  • Maintain adequate margin ratios relative to position size
After Liquidation
  • Review position sizing and risk management strategies
  • Consider lower leverage ratios for similar market conditions
  • Analyze market conditions that led to liquidation
  • Adjust fluctuation guard settings if appropriate
Liquidation protects both your account and the overall system integrity. While liquidation events involve losses, they prevent unlimited losses that could exceed your account balance.