Margin & 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.
marginandminMargindefine the ratio and minimum dollar amount (respectively) of collateral required to open or change a leveraged position (i.e., initial margin).maintenanceandminMaintenancedefine 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:
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 liquidation—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:
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)
Last updated