Leverage & Liquidations
Leverage
Both makers & takers have the ability to trade in a more capital efficient manner by using leverage. This allows a participant's notional exposure to far exceed the amount of collateral provided. Solvency of the system is ensured by a maintenance margin & liquidation system.
For example: if maintenance is 20%, then 1 / 20% = 5, so 5.0x max leverage.
Maintenance
A maintenance margin is set by the market operator. It is the minimum ratio of collateral to notional exposure that a market will allow. This sets how much notional exposure a maker can provide and how much leverage a taker can get.
If the value of the collateral posted by a maker or taker falls below the maintenance requirement, the maker/taker position will enter liquidation to ensure solvency of the protocol.
Both makers and takers have a maintenance requirement based on the notional of their position times the margin percentage requirement for the product.
Example Product: Long-ETH @ 20% maintenance (up to 5x leverage)
We use ETH = $1000 for this example.
Maker
10
$10,000
$2,000
Taker
5
$5,000
$1,000
Liquidations
An account can be liquidated whenever its collateral drops below the maintenance requirement of their position.
Like with any other position change, a liquidation must sit in a pending state until the next oracle update. During this period however, a special lock is placed on the account so that the liquidation process may not be interfered with. The user may not open or close a new position (or be liquidated again) until the liquidation process is completely settled and the lock is cleared.
The maintenance requirement is the same for both takers and makers, and uses the position size and market price to calculate the maintenance threshold.
minMaintenance is used as a floor on the collateral to ensure that any non-zero position has a sufficient incentive to liquidate in the case of under-collateralization.
Upon successful liquidation, the liquidator is allowed to withdraw up to liquidation fee collateral from the account. This fee is optional, as you may want to self-liquidate, and can be computed as follows:
Reward
Liquidators are immediately granted a liquidation reward equal to the liquidation settlement multiplier. This is a multiplier based on the settlement fee of the market
Perennial does not take a protocol or product owner cut of the liquidation fee.
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