Liquidators

1. Initiation of Liquidation:

• When a trader's margin falls below the required maintenance margin and cannot be replenished by canceling open orders, their position becomes eligible for liquidation.

1. Role of Liquidators:

• Liquidators are essential to the market, protecting the protocol from potential bad debt.

• They are responsible for taking over margin accounts, known as TRGs (Trading Risk Groups), canceling open orders, and winding down any open positions.

• Liquidatees are prohibited from placing new orders until the affected account meets the necessary conditions and risky positions are sufficiently buffered.

1. Liquidation Process:

• Liquidators execute a specific liquidation instruction to initiate the process.

• Successful liquidation involves transferring predetermined liabilities (open positions) from the trader trg (liquidatee) to the liquidator trg.

• The liquidator then systematically liquidates liabilities to compensate for the insufficient margin.

1. Maintenance Margin and Profitability:

• The maintenance margin seized by the liquidator is not returned to the trader.

• This policy ensures a minimum level of profitability and incentivizes the operation of liquidation systems.

• Liquidators retain a part of the maintenance margin as a reward for their role in maintaining the protocol’s solvency.

1. Advanced Strategies and Requirements:

• Liquidators may employ sophisticated strategies to minimize slippage during the liquidation of liabilities.

• They aim to maintain a minimum acceptable capital post-liquidation, which is used to re-collateralize their position.

• It's important to note that liquidators must also post margin to satisfy the requirements of the leverage acquired through this process.

1. End Result:

• Any residual collateral after the liquidation process is completed remains with the original trader TRG.

1. Protection Against Protocol Debt:

The overall mechanism ensures that the protocol is shielded from incurring bad debt due to excessively negative unrealized PnL (Profit and Loss), which could devalue margins to the point of insolvency.

How to run a liquidator?

PepperDEX will release an open-source version of a liquidator client running on the Hxro Network.