Liquidations

Positions on VDEX are automatically liquidated if an account’s value (including unrealized PnL) falls below the Maintenance Margin Requirement. This ensures traders do not go into debt or receive margin calls.

How Liquidation Works:

• When liquidation is triggered, the Virtual Market Maker (VMM) absorbs the position to maintain market stability.

• Positions may be partially or fully closed, depending on the account’s balance and risk exposure.

• Liquidations are executed at the best available price on the order book, minimizing slippage.

Liquidation Penalty:

• A 1.5% liquidation fee is applied to the position’s notional value upon liquidation.

• The fee is transferred to the Virtual Insurance Pool (VIP) to protect the system and cover potential losses.

VDEX’s approach eliminates margin calls and ensures positions are closed efficiently to safeguard both traders and platform stability.

Isolated Liquidation Price

This is the price at which a specific position reaches the point of liquidation.

1. Formula Explanation:

   • The liquidation price p' is calculated using: ​p' = (e - s * p) / (|s| * MMF - s)

   • Here:

     • e is the current equity in the account.

     • s is the size of the position.

     • p is the original price of the position.

     • MMF is the maintenance margin fraction, a percentage that indicates the minimum equity required to keep the position open. ​

2. Example:

   • Suppose a trader deposits $1,000 (e = 1000).

   • The trader shorts 3 ETH contracts (s = -3) at $3,000 per contract, with a maintenance margin fraction of 5% (MMF = 0.05).

   • The formula becomes: p' = (1000 - (-3 * 3000)) / (3 * 0.05 - (-3)) This simplifies to: p' = (1000 + 9000) / (0.15 + 3) = 10000 / 3.15 ≈ 3174.60

   • This means if the price of ETH rises to $3,174.60, the position will reach the liquidation threshold.

   • At this price, the trader's remaining equity would be 5% of the notional value of the position or $476.2 based on the calculation (3 * 3174.6 * 0.05 ≈ 476.2)

Cross Liquidation Price

For cross-margining (multiple positions sharing the same margin), the calculation is adjusted to account for the margin used by other positions.

1. Key Terms:

   • Total Maintenance Margin Requirement (MMR_t): Calculate the maintenance margin needed for all positions at current prices: ​MMR_t = |s| · p · MMF

   • Other Positions' Margin Requirement (MMR_o): Subtract the margin requirement of the position in question from MMR_t: ​MMR_o = MMR_t - |s| * p * MMF

   • New Margin Requirement at Price p': Add MMR_o to the margin requirement of the position at the new price: ​MMR_o + |s| * p' * MMF

   • Liquidation Price Formula: Substitute into the equation to find the liquidation price for the position: ​p' = (e - s * p - MMR_o) / (|s| * MMF - s) ​

2. Example:

   • Suppose a trader deposits $1,000 (e = 1000).

   • The trader shorts 1.5 ETH (s = -1.5) at $3,000 and buys 1,000 STRK contracts at $1.75 (MMF = 10% for STRK).

   • Calculate Other Positions' Margin Requirement: MMR_o = 1000 * 1.75 * 0.10 = 175

   • Compute the Liquidation Price for ETH: p' = (1000 - (-1.5 * 3000) - 175) / (1.5 * 0.05 + 1.5)

   • This simplifies to: p' = (1000 + 4500 - 175) / 1.575 ≈ 3380.95.

   • If the ETH price reaches $3,380.95, the equity would fall to the required margin leve