๐ŸŒŠMargin & Liquidations

Margin

Makers and Takers have the ability to trade in a more capital-efficient manner by using leverage. Because trading with leverage means that a participant's notional exposure may far exceed the amount of collateral provided, a risk mitigation mechanism is required via margin and liquidation to prevent insolvency.

In Perennial, the Market Operator sets the parameters maintenance, margin, minMaintenance, and minMargin.

  • margin and minMargin define the ratio and minimum dollar amount (respectively) of collateral required to open or change a leveraged position (i.e., initial margin).

  • maintenance and minMaintenance define the ratio and minimum dollar amount (respectively) of collateral that is required to maintain a leveraged position and prevent it from being liquidated (i.e., maintenance margin).

These parameters set how much notional exposure a Maker can provide and how much leverage a Taker can obtain. Based on these parameters, Makers' and Takers' initial margin and maintenance requirements are defined by:

marginRequirement = max(position * price * margin, minMargin) maintenanceRequirement = max(position * price * maintenance, minMaintenance)

For example, if the maintenance (ratio) is set at 20%, then the maximum leverage a Taker could obtain would be 5.0x (1 / 20% = 5). Assuming the price of ETH is $1000, the table below shows the maintenance margin required according to the notional positions for a Long-ETH product:

Side
Position
Notional
Maintenance
Leverage

Maker

10

$10,000

$2,000

5x

Taker

5

$5,000

$1,000

5x

Liquidations

An account can be liquidated whenever its collateral drops below the maintenanceRequirement for their position.

As is the case with other position changes, a liquidation must sit in a pending state until the next oracle update. However, a special lock is placed on the account during this period of pending liquidation so that the liquidation process cannot 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.

A minimum level of margin, minMaintenance, is set such that all non-zero positions must have enough collateral to incentivize a liquidationโ€”even in cases where a position becomes undercollateralized. The maintenanceRequirement is always no less than the minMaintenance. For risk management purposes, the maintenance requirement for Makers is calculated by assuming 100% utilization of their exposure.

When a position is successfully liquidated, the liquidator can withdraw a fee from the collateral account. The liquidation fee is a parameter that is calculated as a multiple of the settlement fee. The liquidation fee is optional as self-liquidations are permitted. Perennial does not take a protocol or product owner cut of the liquidation fee.

The table below provides an example of the liquidation reward (fee) that can be collected (Assuming a 20% liquidation reward:

Collateral ($)
Maintenance Requirement ($)
Liquidation Reward ($)

10,000

15,000

3,000

Eligible for liquidation

30,000

32,000

6,400

Eligible for liquidation

25,000

20,000

N/A

Safe (above requirement)

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