Liquidation fees are penalty charges applied when positions are automatically closed due to insufficient margin. Understanding these fees is crucial for risk management and avoiding unnecessary costs.
Understanding Liquidation Fees
What are Liquidation Fees?
Liquidation fees are penalty charges applied when positions are automatically liquidated due to insufficient margin.
Trigger: Margin ratio falls below 20%
Fee Rate: 5% of remaining margin
Purpose: Incentivizes liquidators and protects protocol
Payment: Deducted from remaining margin before return
Rate: 5% of remaining margin
Calculation: Remaining Margin × 5%
Maximum: 5% of total margin
Why Liquidation Fees Exist
Incentive: Incentivizes liquidators to execute liquidations
Protocol Protection: Protects the protocol from losses
Market Stability: Maintains market stability
Risk Management: Encourages proper risk management
Liquidation Fee Calculation
Basic Calculation
Example Calculations
Example 1: Standard Liquidation
Liquidation Fee: $800 × 5% = $40
Net Recovery: $800 - $40 = $760
Total Loss: $240 (24% of initial margin)
Example 2: High Leverage Liquidation
Liquidation Fee: $500 × 5% = $25
Net Recovery: $500 - $25 = $475
Total Loss: $525 (52.5% of initial margin)
Example 3: Near-Total Loss
Liquidation Fee: $50 × 5% = $2.50
Net Recovery: $50 - $2.50 = $47.50
Total Loss: $952.50 (95.25% of initial margin)
Liquidation Fee Impact
Impact on Different Margin Levels
Liquidation fees have varying impact depending on remaining margin:
High Remaining Margin (> $500)
Impact: Significant but manageable
Recovery: Good recovery rate
Strategy: Focus on prevention
Medium Remaining Margin ($100 - $500)
Recovery: Decent recovery rate
Strategy: Balance prevention and recovery
Low Remaining Margin (< $100)
Recovery: Poor recovery rate
Strategy: Focus on prevention
Impact on Different Leverage Levels
Liquidation fees have varying impact depending on leverage:
Low Leverage (1x-5x)
Margin Ratio: Higher margin ratios
Liquidation Risk: Lower liquidation risk
Fee Impact: Lower fee impact
Strategy: Suitable for beginners
Medium Leverage (6x-15x)
Margin Ratio: Moderate margin ratios
Liquidation Risk: Moderate liquidation risk
Fee Impact: Moderate fee impact
Strategy: Suitable for experienced traders
High Leverage (16x-30x)
Margin Ratio: Lower margin ratios
Liquidation Risk: Higher liquidation risk
Fee Impact: Higher fee impact
Strategy: Only for expert traders
Liquidation Fee 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 Fee Management
Essential practices for managing liquidation fees:
Fee Calculation
Always Calculate: Calculate potential liquidation fees
Include in Planning: Factor fees into risk planning
Monitor Costs: Track potential fee exposure
Optimize Strategy: Adjust strategy to minimize fees
Risk Assessment
Liquidation Risk: Assess liquidation risk regularly
Fee Impact: Assess impact of liquidation fees
Cost-Benefit: Analyze cost-benefit of prevention
Strategy Optimization: Optimize strategy for fee minimization
Prevention Optimization
Strategies for optimizing liquidation fee prevention:
Early Intervention
Early Warning: Respond to early warnings
Proactive Management: Be proactive in risk management
Quick Response: Respond quickly to risk changes
Prevention Focus: Focus on prevention over recovery
Cost-Benefit Analysis
Prevention Cost: Cost of preventing liquidation
Liquidation Cost: Cost of liquidation including fees
Cost Comparison: Compare prevention vs. liquidation costs
Strategy Selection: Choose cost-effective strategy
Liquidation Fee Examples
Example 1: Preventable Liquidation
Margin Ratio: 15% (dangerous)
Prevention Cost: $200 (add margin)
Liquidation Cost: $40 (5% fee)
Decision: Add margin to prevent liquidation
Savings: $160 (avoiding liquidation fee)
Example 2: Unavoidable Liquidation
Margin Ratio: 18% (very dangerous)
Prevention Cost: $300 (add margin)
Liquidation Cost: $35 (5% fee)
Decision: Accept liquidation
Reason: Prevention cost exceeds liquidation cost
Example 3: High Leverage Liquidation
Margin Ratio: 5% (extremely dangerous)
Prevention Cost: $800 (add margin)
Liquidation Cost: $50 (5% fee)
Decision: Accept liquidation
Reason: Prevention cost far exceeds liquidation cost
Tools for calculating liquidation fees:
Basic Calculator
Input: Initial margin, unrealized loss
Output: Liquidation fee and net recovery
Purpose: Quick fee calculation
Usage: Before opening positions
Advanced Calculator
Input: Multiple parameters including leverage
Output: Comprehensive liquidation analysis
Purpose: Detailed liquidation analysis
Usage: For thorough risk assessment
Tools for preventing liquidations:
Risk Monitoring
Margin Ratio: Real-time margin ratio monitoring
Liquidation Price: Current liquidation price
Risk Alerts: Alerts for liquidation risk
Prevention Alerts: Alerts for prevention opportunities
Prevention Cost: Cost of preventing liquidation
Liquidation Cost: Cost of liquidation including fees
Cost Comparison: Comparison of prevention vs. liquidation costs
Strategy Optimization: Optimization for cost minimization
Common Liquidation Fee Mistakes
Common mistakes in liquidation fee management:
Problem: Not factoring liquidation fees into calculations
Solution: Always include liquidation fees
Prevention: Use fee calculators
Poor Prevention
Problem: Not taking action to prevent liquidations
Solution: Take proactive prevention measures
Prevention: Use prevention tools
Over-Prevention
Problem: Spending too much to prevent liquidations
Solution: Balance prevention and liquidation costs
Prevention: Use cost-benefit analysis
Inadequate Planning
Problem: Not planning for liquidation costs
Solution: Plan for all costs including liquidation fees
Prevention: Use comprehensive planning tools
Watch for these warning signs:
High Liquidation Risk
Sign: High risk of liquidation
Action: Take prevention measures
Prevention: Regular risk monitoring
Poor Cost Management
Sign: Poor liquidation cost management
Action: Improve cost management
Prevention: Cost management tools
Inadequate Prevention
Sign: Inadequate liquidation prevention
Action: Improve prevention measures
Prevention: Prevention tools and strategies
Now that you understand liquidation fees, continue to:
⚠️ Important Note: Liquidation fees are penalty charges that can significantly impact your trading capital. Always focus on preventing liquidations through proper risk management and margin maintenance.