Liquidations and Auto-Deleveraging (ADL)

Liquidation happens when the value of a trader's position falls below a certain threshold, rendering their margin insufficient to cover the borrowed funds. This process protects EVEDEX from incurring losses due to the trader’s inability to repay the borrowed amount.

Key reasons for liquidation include:

• Excessive Leverage: Using high leverage magnifies both gains and losses. Even minor price movements against the trader's position can lead to significant losses.

• Volatility: Cryptocurrency markets are highly volatile, and sudden price movements can quickly deplete the margin supporting leveraged positions.

• Insufficient Margin Maintenance: Traders are required to maintain a minimum margin level called Maintenance Margin. Failing to meet this requirement triggers liquidation.

NOTE! The percentage of Maintenance Margin for each instrument is individual and depends on the associated risks and the position size.

How Are Users Liquidated?

When a trader’s position approaches the liquidation price, EVEDEX takes steps to close the position automatically.

Here’s how it typically works:

• Monitoring Account Health: EVEDEX closely monitors user's accounts when their account health enters the risk zone.The Liquidation Engine tracks positions every second during a margin call, ensuring rapid response to minimize unexpected losses (in normal conditions, positions 2.are checked every 5 seconds). Users are often notified via a Margin Call, informing them that their account is under increased scrutiny.

• Margin Call: When a margin call occurs, traders can add funds to maintain the position. However, during a margin call, we restrict the ability to buy more quantities of the current positions in the same direction, disable fund transfers from the trading balance, and prevent leverage reduction. If a user wishes to withdraw funds during a margin call, they must first close their open positions. After closing the positions, any remaining balance will be available for withdrawal.

• Forced Liquidation: If the trader fails to add funds or the market moves too quickly, EVEDEX forcibly closes the position to recover the borrowed funds. Additionally, EVEDEX charges a 2% liquidation fee, deducted from the required Maintenance Margin buffer.

When a user’s positions are liquidated, their account balance can drop to zero or close to zero, depending on the severity of the market movement and the leverage used.

NOTE! To avoid sudden local volatility, liquidation is based on the weighted average price, known as the Mark Price, rather than the Last Price. This ensures traders are not unfairly liquidated due to momentary spikes or dips.

The Liquidation Formula

trading balance + positions.sum(unrealized pnl) <= positions.sum(maintenance margin)

In other words, the Liquidation Engine starts to close trader positions if the total unrealized P&L of all opened positions and the available trading balance falls below the required Maintenance Margin level.

Example

Trader Joe opens a BTC position with 10x leverage for $10,000. The details of the position are as follows:

• Initial Margin (IM): Since Joe uses 10x leverage, the Initial Margin is 10% of the position size, which equals $1,000.

• Maintenance Margin (MM): The Maintenance Margin is 0.5% of the position size, which equals $50.

Note: If you're not familiar with the terms Initial Margin (IM) and Maintenance Margin (MM), you can learn more in the Margin section.

If the unrealized P&L on the position drops by 80%, Joe will receive a Margin Call. EVEDEX will notify him to add more funds to his account to restore his Account Health and avoid liquidation.

However, if the position's unrealized P&L falls by more than 95% and Joe ignores the issued Margin Call, the liquidation process will be triggered.

A 2% liquidation fee will be applied.

When Liquidation Isn't Enough: Auto-Deleveraging (ADL)

In most cases, liquidation is sufficient to close a position and recover losses. However, in extreme market conditions with limited liquidity, the system may not be able to close a position at or above the bankruptcy price. In such scenarios, Auto-Deleveraging is activated.

What Is Auto-Deleveraging?

Auto-Deleveraging is a fallback risk management strategy employed by cryptocurrency exchanges to close positions when they can’t fully absorb the losses. While we understand how painful this can be for profitable users, we strive to minimize the use of ADL and provide transparent conditions for its activation.

How ADL Works

Building the Candidate Queue:

• The candidate queue for ADL consists of profitable positions of the users (let's call them ADL-affected) sorted by PNL% relative to the initial margin in descending order (i.e., the most profitable positions paying the least margin).

• This queue is regularly pre-calculated.

During ADL Liquidation:

• The highest-priority positions are selected from the candidate queue until their total volume matches the required amount for fully liquidating the user (let's call them Liquidation-affected).

• Open orders on the affected trading pair are canceled for the selected "ADL-affected" users to prevent execution after their deleveraging.

• For the "ADL-affected" users, OTC orders (not matched through the order book) are created to close positions at the Bankruptcy Price, covering the liquidated user’s position volume.

• Notifications about all these actions are sent to all affected users.

Example of ADL

A user buys with 100x leverage for $1,000.

• Liq price = 99,050

• Bankruptcy price = 99,000

Let’s consider the following scenarios:

Price drops to 99,050, and there is liquidity at 99,050 for the full 100k:

• The user is fully liquidated through the order book using the standard method.

Price drops to 99,050, but there is only 50k USDT at bid = 99k, with the rest available at bid = 97k:

• 50k is liquidated through the order book.

• The remaining 50k cannot be liquidated without incurring a loss. The exchange seeks another user or group of users to close these 50k directly, bypassing the order book.

We aim to maintain stability while minimizing user impact by implementing this transparent and structured approach. Understanding ADL helps traders manage their strategies effectively and mitigate potential risks.