Liquidation

In plain English

A leveraged position cannot be allowed to accumulate unlimited losses against limited support. When its margin condition crosses a venue-defined boundary, the venue takes over and reduces risk. Depending on the design, it may cancel orders, close part of the position, close all positions, convert collateral, or use additional backstop mechanisms.

Liquidation protects the market’s accounting system. It is not a trader-selected stop order and it is not guaranteed to execute at one exact price.

How it works

The venue continuously or periodically compares eligible equity with its maintenance margin requirement. Many venues use a mark price rather than the last trade to reduce the effect of a single abnormal print. When the threshold is breached, automated rules begin.

The process can include liquidation fees and price impact. Cross-margin liquidation may consider multiple positions and collateral assets, while isolated liquidation generally focuses on the assigned position.

Why it matters

A displayed liquidation price compresses several moving inputs into one estimate. Funding, added or removed collateral, fees, position changes, collateral valuation, and risk-parameter changes can move it. Traders should manage risk before liquidation becomes the exit plan.

Worked example

Consider a $10,000 position supported by $1,000 of eligible collateral with a simplified $500 maintenance requirement. After a $550 unrealized loss, the remaining equity is $450 before other costs.

Because $450 is below $500, the position breaches the simplified maintenance threshold. The venue can begin liquidation even though $450 of equity appears to remain. Real calculations can include several additional inputs.

How it works on Lynx

Lynx documentation currently describes liquidation when Net PnL losses and accumulated fees reach 85% of the position’s collateral. The remaining collateral is taken as the liquidation fee, and the position’s losses and fees flow to its corresponding liquidity pool.

This is not the same as crossing a generic maintenance-margin percentage. Traders should use Lynx’s displayed liquidation level and current protocol parameters rather than importing a threshold from another venue.

Common misconception

A liquidation price is not the same as a stop-loss price. A stop is a trader instruction subject to execution conditions; liquidation is a venue risk action triggered by margin rules.