Liquidation

Calculating Liquidation Price on Vela Trade

The liquidation price represents the threshold at which a trader’s position is automatically closed (liquidated) to prevent further losses. To calculate the liquidation price, the following factors are considered: Max Leverage, Unsettled Obligations, and Maintenance Margin.

Components of Liquidation Price Calculation

• Max Leverage: 200x for all assets in the pool (BTC and USDC).

• Unsettled Obligation: This is the sum of fees owed by the position to the liquidity pool. These fees consist of a static close position fee and a dynamic margin fee associated with borrowing exposure to the asset. It is reflected as a reduction in collateral, regardless of price action.

• Minimum Maintenance Margin: This is calculated as the product of the nominal size of the position (in USD) and the minimum maintenance margin ratio (1 / Max Leverage). This threshold is critical; when the amount of collateral crosses it, the liquidation process will be triggered.

• Liquidation Price: The price at which a trader’s position will be liquidated. Any remaining maintenance margin is not returned to the trader.

The Liquidators:

On Vela Trade, the liquidation process is automated and constantly monitored. The protocol’s liquidation engine ensures positions are promptly liquidated when they exceed the max leverage. Since Vela Trade uses an asset-backed liquidity pool (consisting only of BTC and USDC), there is always sufficient liquidity available in the pool to close positions. No external liquidator capital is required because the assets in the pool are used to settle positions.

This structure ensures that liquidations are always backed by the assets in the pool, and this can also serve as a potential yield source for liquidity providers.