Liquidations

An account is subject to liquidation if its Account Margin Ratio falls below its Maintenance Margin Ratio. Orderly uses the Mark Price to represent a contract’s estimated value. As it derives from multiple reputable spot exchanges (see Index Price) and the funding rate, it is less volatile than the Last Price and discourages bad actors from manipulating the market price to trigger liquidations.

When an account is under liquidation, its current open orders are automatically cancelled and its USDC balance is frozen.

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Decentralized Liquidations

Unlike CEXes (Centralized Exchanges) or a few other dApps such as dYdX, at Orderly, liquidations are decentralized.

Most of the time, CEXes directly close positions on the orderbook, which often triggers cascading liquidations, hurting traders further and encouraging bad actors to manipulate market prices.

Orderly adopts a decentralized liquidation model where positions are transferred to liquidators at a discount instead of being market sold in the orderbook. It is fully decentralized as anyone with an Orderly account can act as a liquidator, as long as the account has enough margin to take over the liquidated positions. Further details on how an account can claim liquidating positions can be found in the API docs.

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Liquidation Trigger

A liquidation is triggered if the Account Margin Ratio (AMR) is below the Maintenance Margin Ratio (MMR) required for the account (see here for more details).

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Liquidation Tiers

All trading pairs are not equal in term of risk. In Orderly, there are two groups of symbol tier :

• Low Tier Risk : Liquidators can only claim a ratio of all symbols. Claiming a single symbol is not allowed
• High Tier Risk : Liquidators can claim 1 single symbol

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Liquidation amount

The amount of positions that need to be liquidated is calculated for both low tier and each symbol of high tier perp markets. Whenever possible, each amount is computed so that the Account Margin Ratio equals the Initial Margin Ratio.

If the account has multiple positions in the low tier risk, the positions will be partially liquidated in a volume-weighted fashion.

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Liquidation fee

When an account is liquidated, a User Liquidation Fee is incurred. This is split between the Orderly Insurance Fund and the liquidator. Each perpetual market has its own Liquidation Fee:

The overall User Liquidation Fee and Liquidator Fee are calculated as follows:

Low Tier Liquidation (multiple symbols):

User Liquidation Fee = Sum[Liquidation Fee(Symbol i) * Abs(Notional i)]
Liquidator Fee = Sum[Liquidator Fee(Asset i) * Abs(Notional i)]

High Tier Liquidation (1 symbol):

User Liquidation Fee = Liquidation Fee(Symbol i) * Abs(Notional i)
Liquidator Fee = Sum[Liquidator Fee(Asset i) * Abs(Notional i)]

• If the Account Margin Ratio is higher than the User Liquidation Fee, the User Liquidation Fee is split in half between the Insurance Fund and the liquidator (Insurance Fund and Liquidator each receives 0.5 * User Liquidation Fee).

• If the Account Margin Ratio is between User Liquidation Fee and Liquidator Fee, then a fee equal to 0.5 * User Liquidation Fee is paid to the liquidator, and the remaining account margin is transferred to the insurance fund.

• In the unlikely scenario that the remaining margin of the account cannot cover the Liquidator Fee, the account’s balance and positions are transferred to the insurance fund. Those positions can still be claimed by liquidators (see Insurance Fund & ADL).

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Full vs Partial Liquidator Takeover

The minimum notional for a partial liquidation takeover is 10,000 USDC for low tier liquidations and 5,000 USDC for high tier liquidations. For liquidation positions below the threshold, in case of a low tier liquidation, the liquidator must take over all of the positions of the liquidated user and in case of a high tier liquidation of a specific symbol, the liquidator must claim the entire position. Above the threshold, the liquidator could choose to take over only a percentage of the positions of the liquidated user, provided that the notional of the positions taken over exceeds the threshold.

Before transferring positions to the liquidator, Orderly makes sure that the liquidator can effectively take over the positions, doing similar margin checks as for new order placements.