1. Forced Liquidation

When the price volatility results in unrealized losses, which causes the user's margin to fall short of "maintenance margin + liquidation fees", forced liquidation will occur. In the case of forced liquidation, the system forcibly takes over the margin account involved to prevent the equity of the account from falling into negative territory.
 

2. Forced Liquidation Conditions and Process

In AlphaX Perpetual Futures, the conditions for forced liquidation depend on Risk (risk ratio). When a position's Risk is ≥100%, the system will reduce or liquidate the position.

1. Risk

The Risk assesses whether the collateral assets in the contract are adequate. The lower the Risk, the more sufficient the collateral and the more secure the position; and vice versa. We advise users to closely monitor the Risk in case of any change, and stay attentive to emails, in-app messages, and SMS notifications to prevent any forced liquidation.
  • For Isolated-Margin Mode: Risk = (Maintenance Margin + Trading Fees for Position Closing) / (Position Margin + Unrealized PnL)
  • For Cross-Margin Mode: Risk = (Sum of Cross-Margin Positions' Maintenance Margin + Trading Fees for All Cross-Margin Position Closing) / (Balance - Combined Margins of Isolated-Margin Positions - Frozen Assets + Combined Unrealized PnL of Cross-Margin Positions)
Note: Maintenance Margin and Trading Fees for Position Closing in Cross Margin mode are calculated according to the position data and the size of orders pending opening, while Frozen Assets refer to the fees and margin occupied by isolated-margin orders and the frozen fees for opening cross-margin positions.

 

2. Liquidation Process

In general, the procedure can be classified into two scenarios, with detailed examples provided at this article's conclusion.

2.1 Process for the Isolated Margin Mode

Under this mode, when the Risk equals or is greater than 100% (that is, the current collateral is ≤ the margin needed for maintaining the position and the trading fees for position closing), it triggers forced liquidation. The process unfolds as follows:
  1. The system freezes the position and restricts users from adjusting the position's margin, placing orders, etc.
  2. Then, the system liquidates the position according to the calculated bankruptcy price.

2.2 Process for the Cross Margin Mode

When the Risk reaches or is greater than 100% (that is, when the current collateral is ≤ the margin needed for maintaining all cross-margin positions and the trading fees for position closing), it triggers forced liquidation based on the following process:
  1. The system freezes the margin account and prevents users from making deposits, withdrawals, transfers, placing orders, canceling orders, and other operations.
  2. The liquidation process stops if the Risk drops below 100% after all pending orders are canceled in the corresponding margin account.
  3. The liquidation process also halts if the risk drops below 100% after closing long and short positions of the same cryptocurrency in the margin account at current price to offset each other.
  4. In case the Risk remains ≥ 100% after executing the above steps, the system conducts forced liquidation for cross-margin positions at the bankruptcy price, sorting by unrealized PnL (positions with greater losses liquidated first) until the Risk drops below 100% or all positions of the margin account are liquidated.
 

3. Estimated Liquidation Price

This is the price at which it is estimated when the Risk will reach 100% (for investor reference only). However, the actual liquidation price when the Risk reaches 100% shall prevail.
 

3.1 Isolated Margin Mode

3.1.1 The price varies for long and short positions of the same contract.

In this mode, the estimated liquidation price for long and short positions of the same contract is different based on the position margin.

3.1.2 Factors affecting the estimated liquidation price

  • Users add margin to the open position or reduces the position margin.
  • It's at the time of funding settlement, including receiving or paying funding fees.

3.2 Cross Margin Mode

3.2.1 Estimated liquidation price for same contracts in opposite directions

In this mode, the estimated liquidation price is the same for different-direction positions of the same contract, as the long and short positions will offset each other.

3.2.2 Factors affecting the estimated liquidation price

  • Price fluctuations result in a change in the unrealized PnL, which causes a change in the collateral asset.
  • Opening new positions involves the usage of account funds.
  • Transferring funds into or out of the account.
  • Deducting trading fees from position opening and closing.
  • It's at the time of funding settlement, including receiving or paying funding fees.
 

4. Bankruptcy Price

This is the price when the position margin is completely lost. It's also the price that will be used by the system to conduct forced liquidation when the Risk reaches or exceeds 100%. The price isn't displayed on the candlestick chart, as the liquidation is not processed by the matching system. In addition, it is not equal to the actual forced liquidation price.

 

5. Insurance Fund

The Insurance Fund is used to cover losses generated due to forced liquidation.
  1. The source of Insurance Fund: In the case of forced liquidation, the system takes over the position based at the bankruptcy price and processes it in the market. Any profits generated thereby will be added to the Insurance Fund.

  2. How is the Insurance Fund used: In the event of forced liquidation, the system takes over the position based on the bankruptcy price and processes it in the market. If the position is filled at a price inferior to the bankruptcy price or cannot be processed, losses incurred thereby will be covered by the Insurance Fund. When the Fund is depleted or insufficient, it will trigger Auto-Deleveraging (ADL).

6. Liquidation Examples

6.1 How Isolated-Margin Positions Are Liquidated

Let's assume that User A has an account balance of 1,100 USDT. He opens long a position of 10 ETH (10x leverage) when 1 ETH equals 1,000 USDT. If the ETH/USDT price falls to 904, his position's conditions will unfold as follows. (Suppose that the maintenance margin rate is 0.4%, and the taker rate is 0.05%.)
  • Initial Margin = Average Position Price * Position Size / Leverage = 1,000 * 10 / 10 = 1,000 USDT (wherein the position size refers to the amount of the ETH bought)
  • Unrealized PnL = (Market Price - Average Position Price) * Position Size = (904 - 1,000) * 10 = -960 USDT
  • Risk = (Maintenance Margin + Trading Fees for Position Closing) / (Position Margin + Unrealized PnL) = (904*10*0.4% + 904*10*0.05%) / (1,000 - 960) = 101.70%
It's obvious that the Risk is ≥100%, which triggers the forced liquidation. User A's position is taken over by the system at a bankruptcy price of 900.4502251, and his position margin is fully lost.
  • Realized PnL = (Bankruptcy Price - Average Position Price) * Position Size = (900.4502251 - 1,000) * 10 = -995.4977489 USDT
  • Trading Fees for Position Closing = Bankruptcy Price * Position Size * Trading Fee Rate = 900.4502251 * 10 * 0.05% = 4.502251126 USDT
Then, the system executes the position closing on the market. If it's executed at 902 which is better than the bankruptcy price, a profit will be generated and injected to the Insurance Fund. If it's executed at 900, a deficit will be incurred and covered by the Insurance fund.
  • Profit = (Execution Price - Bankruptcy Price) * Position Size = (902 - 900.4502251) * 10 = 15.497749 USDT
  • Deficit = (Execution Price - Bankruptcy Price) * Position Size = (900 - 900.4502251) * 10 = -4.502251 USDT

6.2 How Cross-Margin Positions Are Liquidated

Let's assume that User A's account has a balance of 5,000 USDT. He opens long 2 BTC at a price when 1 BTC equals 10,000 USDT and opens long 10 ETH when 1 ETH equals 1,000 USDT. The leverage for both positions is 10x. When BTC falls to 8,004 USDT and ETH falls to 912 USDT, User A's position conditions are as follows (Assuming that the maintenance margin rate is 0.4%, and the taker rate is 0.05%).
  • Balance = Deposits - Withdrawals + Total Realized PnL + Total Funding Fees - Total Trading Fees = 5,000 - 0 + 0 + 0 - (10,000*2*0.05% + 1,000*10*0.05%) = 4,985 USDT
  • Unrealized PnL for BTC = (Market Price - Average Position Price) * Position Size = (8,004 - 10,000) * 2 = -3,992 USDT
  • Unrealized PnL for ETH = (Market Price - Average Position Price) * Position Size = (912 - 1,000) * 10 = -880 USDT
  • Cross-Margin Position Risk = (Sum of Cross-Margin Positions' Maintenance Margin + Trading Fees for All Cross-Margin Position Closing) / (Balance - Combined Margins of Isolated-Margin Positions - Frozen Assets + Combined Unrealized PnL of Cross-Margin Positions) = [(8,004*2*0.4% + 912*10*0.4%) + (8,004*2*0.05% + 912*10*0.05%)] / (4,985 - 0 - 0 - 3,992 - 880) = 100.07% 
As the position risk exceeds 100%, the forced liquidation is triggered. If User A doesn't have any pending orders and has no short and long positions of the same contract to hedge against each other, the system will liquidate User A's positions based on unrealized PnL, starting with the position with the most significant loss. BTC positions will be liquidated first, after which, if the Risk remains ≥100%, ETH positions will be closed until the Risk falls below 100% or all positions in the margin account are liquidated.