Understanding liquidation mechanics is crucial for risk management on MegaTAO. This section explains how liquidations work, when they occur, and how to prevent them.
What is Liquidation?
Liquidation is the automatic closure of a position when the margin ratio falls below the maintenance margin requirement.
Trigger : Margin ratio falls below 20%
Process : Position automatically closed at market price
Fee : 5% penalty on remaining margin
Purpose : Prevents negative balances and protects the protocol
Why Liquidations Exist
Risk Management : Prevents excessive losses
Protocol Protection : Protects the protocol vault and its orderbook matching system
Market Stability : Maintains market stability
User Protection : Limits maximum loss to initial margin
Liquidation Trigger
Margin Ratio Threshold
Liquidation occurs when the margin ratio falls below 20%:
Margin Ratio Calculation
Threshold Levels
Healthy : > 35% margin ratio
Caution : 25-35% margin ratio
Danger : 20-25% margin ratio
Liquidation : < 20% margin ratio
Liquidation Process
When liquidation is triggered:
Detection : System detects margin ratio below 20%
Trigger : Liquidation process begins
Execution : Position closed at current market price
Fee : 5% penalty deducted from remaining margin
Settlement : Remaining margin returned to user
Liquidation Price Calculation
Long Position Liquidation Price
For long positions, liquidation occurs when price falls to:
Example Calculation
Liquidation Price : $100 × (1 - 0.20 / 10) = $98.00
Price Drop : 2% adverse move triggers liquidation
Short Position Liquidation Price
For short positions, liquidation occurs when price rises to:
Example Calculation
Liquidation Price : $100 × (1 + 0.20 / 10) = $102.00
Price Rise : 2% adverse move triggers liquidation
Liquidation Examples
Example 1: Long Position Liquidation
Position : Long $10,000 Alpha token position
Margin : $1,000 (10x leverage)
Liquidation Price : $98.00
Price Drop : Alpha token drops to $98.00
Liquidation : Position automatically closed at $98.00
Loss : $200 (2% of position value)
Penalty : 5% of remaining margin ($40)
Total Loss : $240 (24% of initial margin)
Example 2: Short Position Liquidation
Position : Short $10,000 Alpha token position
Margin : $1,000 (10x leverage)
Liquidation Price : $102.00
Price Rise : Alpha token rises to $102.00
Liquidation : Position automatically closed at $102.00
Loss : $200 (2% of position value)
Penalty : 5% of remaining margin ($40)
Total Loss : $240 (24% of initial margin)
Example 3: High Leverage Liquidation
Position : Long $30,000 Alpha token position
Margin : $1,000 (30x leverage)
Liquidation Price : $99.33
Price Drop : Alpha token drops to $99.33
Liquidation : Position automatically closed at $99.33
Loss : $201 (0.67% of position value)
Penalty : 5% of remaining margin ($40)
Total Loss : $241 (24.1% of initial margin)
Liquidation Prevention
Early Warning System
MegaTAO provides early warnings before liquidation:
30% Margin Ratio : First warning - consider adding margin
25% Margin Ratio : Serious warning - add margin or close position
22% Margin Ratio : Final warning - immediate action required
20% Margin Ratio : Liquidation triggered
Warning Actions
Add Margin : Deposit more TAO to improve margin ratio
Close Position : Close position to prevent liquidation
Reduce Size : Reduce position size to improve margin ratio
Monitor Closely : Watch position more carefully
Prevention Strategies
Margin Management
Healthy Margin : Maintain margin ratio above 35%
Regular Monitoring : Check margin ratio frequently
Quick Response : Act quickly when margin gets low
Emergency Fund : Keep extra margin available
Position Sizing
Conservative Sizing : Use smaller position sizes
Risk Limits : Set limits on position sizes
Diversification : Spread risk across multiple positions
Leverage Limits : Use appropriate leverage levels
Risk Management
Stop Losses : Always use stop losses
Take Profits : Take profits when available
Position Limits : Set limits on total exposure
Regular Review : Review positions regularly
Liquidation Fees
Liquidation incurs a 5% penalty on remaining margin:
Fee Calculation
Incentive : Incentivizes liquidators to execute liquidations
Protocol Protection : Protects the protocol from losses
Market Stability : Maintains market stability
Risk Management : Encourages proper risk management
Example 1: Standard Liquidation
Liquidation Fee : $800 × 5% = $40
Net Recovery : $800 - $40 = $760
Example 2: High Leverage Liquidation
Liquidation Fee : $500 × 5% = $25
Net Recovery : $500 - $25 = $475
Liquidation Process
Automatic Process
Liquidations are executed automatically by the protocol:
Detection : System monitors margin ratios continuously
Trigger : Margin ratio falls below 20%
Execution : Position closed at current market price
Fee Deduction : 5% penalty deducted from remaining margin
Settlement : Remaining margin returned to user
Notification : User notified of liquidation
Execution Details
Market Price : Position closed at current market price
No Slippage Protection : May execute at worse prices during volatile periods
Immediate : Liquidation occurs immediately when triggered
Irreversible : Cannot be reversed once triggered
Manual Liquidation
Users can also manually close positions before liquidation:
Manual Close Benefits
Better Prices : May get better execution prices
No Penalty : Avoids 5% liquidation penalty
Control : User maintains control over timing
Planning : Can plan exit strategy
When to Manually Close
Margin Low : When margin ratio is getting low
Market Conditions : When market conditions deteriorate
Risk Management : As part of risk management strategy
Profit Taking : When profit targets are reached
Liquidation Risk Management
Risk Assessment
Essential practices for managing liquidation risk:
Position Monitoring
Regular Checks : Monitor positions daily
Margin Tracking : Track margin ratio continuously
Price Monitoring : Watch price movements closely
Alert Setup : Set alerts for key levels
Position Limits : Set limits on position sizes
Leverage Limits : Use appropriate leverage levels
Total Exposure : Limit total leveraged exposure
Correlation Limits : Consider correlation between positions
Emergency Procedures
What to do when liquidation risk increases:
Assess Situation : Evaluate current position status
Add Margin : Deposit more TAO if possible
Close Position : Close position if necessary
Reduce Size : Reduce position size if possible
Seek Help : Contact support if needed
Prevention Measures
Stop Losses : Always use stop losses
Position Sizing : Use appropriate position sizes
Margin Management : Maintain healthy margin ratios
Risk Planning : Plan for adverse scenarios
Risk Calculators
Tools for calculating liquidation risk:
Liquidation Price Calculator
Input : Entry price, leverage, maintenance margin
Output : Liquidation price
Purpose : Plan for liquidation risk
Usage : Before opening positions
Margin Ratio Calculator
Input : Position value, unrealized P&L, available margin
Output : Current margin ratio
Purpose : Monitor position health
Usage : During position management
Tools for monitoring liquidation risk:
Real-time Monitoring
Margin Ratio : Live margin ratio display
Liquidation Price : Current liquidation price
Risk Alerts : Alerts for risk levels
Position Status : Real-time position status
Historical Analysis
Liquidation History : Past liquidation events
Risk Patterns : Historical risk patterns
Performance Analysis : Impact of liquidations on performance
Strategy Optimization : Optimize strategies based on liquidation history
Now that you understand liquidation mechanics, continue to:
⚠️ CRITICAL WARNING : Liquidations result in significant losses and a 5% penalty. Always maintain healthy margin ratios and use proper risk management to avoid liquidations.
Last updated 3 months ago