Liquidation Mechanism
Last updated
Last updated
A position is subject to liquidation when the position's remaining collateral cannot cover the losses incurred. This happens when the price moves against the position and/or the position is continuously paying funding payment.
In particular, the position will be liquidated when the the position's collateral ratio falls below the collateral ratio maintenance requirement (i.e. 12.5% or leverage of 8x). As a trader, it is very important to monitor the position's health and make sure that your position is well above the maintenance level.
On Tribe3, users trade with isolated margin, which means collateral is assigned to a specific position, thereby allowing users to manage the risk of each individual position.
When your position is liquidated, part or all of your position's collateral will be taken as liquidation penalty. In particular, the liquidation penalty equals to 10% of the liquidation position.
| Type | Collateral Ratio | Description |
|---|---|---|
Liquidations could occur at futures price or oracle price depending on the spread between the two prices ("Futures Oracle Price Gap"). Under normal circumstances where the Futures Oracle Price Gap is smaller or equal to 10% on an absolute basis, liquidations occur at futures price. However, in the unlikely event that the Futures Oracle Price Gap is bigger than 10% on an absolute basis, liquidations occur at oracle price (i.e. leverage ratio and current margin ratio calculated using oracle price will be used to test for maintenance margin ratio compliance). This construct ensures that:
Liquidations occur in a timely manner when futures price severely lags oracle price and
Users will not be unfairly liquidated due to future price manipulation
Trading futures could be risky, especially when leverage is applied or when shorting. To minimise your liquidation risk, you should:
Choose an appropriate leverage level - the higher the leverage, the more likely a position will be liquidated, especially in a volatile market
Do your own research before trading - understand the risk associated with the trade (e.g. underlying assets, collateral pledged, leverage applied etc.)
Monitor your collateral ratio closely - cut loss or increase margin when the collateral ratio approaches maintenance collateral ratio (i.e. 8x)
Initial collateral ratio
20% (i.e. leverage of 5x)
Minimum amount of collateral required when opening a position
Maintenance collateral ratio
12.5% (i.e. leverage of 8x)
Minimum amount of collateral required after a position has been opened. If the collateral ratio falls below 12.5% (i.e. leverage of 8x) and remains above 10% (i.e. leverage of 10x), 50% of the position will be partially liquidated. The position is partially liquidated until the collateral ratio increases above maintenance collateral ratio. Positions with a notional value of 0.05 WETH or below will be subject to full liquidation.
If the collateral ratio falls below 10% (or leverage of 10x), the whole position will be liquidated.