Liquidation Mechanism

Liquidation Overview in Trading

Liquidation occurs when a trader's total position value (which includes position margin, unrealized profit and loss (PNL), minus borrowing and funding fees) falls below the required maintenance margin. In such cases, a liquidation is triggered, and the position is closed by the keeper.

Liquidation Price Formulas

• Long Position: pl = {po x n - M + Funding + Interest} / {(1 - mm) x n}

• Short Position: pl = {po x n + M - Funding - Interest} / {(1 + mm) x n}

Where:

• $po$: Entry Price

• $M$: Initial Margin

• $n$: Number of Positions

• Funding: Funding Fees

• Interest: Borrowing Fees

• $mm$: Maintenance Margin Rate

Liquidation Execution

On the Argon, Protocol liquidations are carried out by both the system and decentralized liquidation robots. The system robot handles liquidations routinely, but in high-demand scenarios, the decentralized robot, relying on ChainLink prices, assists in executing liquidations. Community liquidators using the decentralized robot receive a 5 USDC reward per executed liquidation. Remaining margins, after deductions, are refunded to the trader’s wallet.

Liquidation Process Details

The maximum a trader can lose is the margin of their position. During liquidation, deductions occur in this order: Borrowing Fees → Funding Fees → Unrealized PNL → Insurance Fund → Margin returned to the trader. If the margin depletes during this process, the trader receives nothing back.

The position margin is calculated as: Unrealized PNL + Insurance Fund (Initial Position Value x 0.2%) + Returned Margin + Funding Fees + Borrowing Fees.

Example Scenario

• Consider a trader opening a 100x leveraged long position with 100 USDC as initial margin on ETH priced at 1,000 USDC, making the position size 10 ETH.

• Ignoring borrowing and funding fees, the liquidation price is:

  • $Pl = Entry Price x (1 - 1/L) / (1 - mm) = 994.97 USDC$

Upon liquidation:

1. At a price of 930 USDC:

   • Unrealized PNL: (930 - 1000) x 10 = -70 USDC

   • Insurance Fund: 930 x 10 x 0.002 = 18.6 USDC

   • Margin Returned: 100 - 70 - 18.6 = 11.4 USDC (assuming no borrowing/funding fees)

2. At a price of 980 USDC:

   • Unrealized PNL: (980 - 1000) x 10 = -200 USDC

   • After deductions, all remaining margin is added to the fund pool.