Liquidation

Liquidation happens when your account equity falls below the maintenance margin required for an open position. This page explains the trigger, liquidation price, bankruptcy price, insurance fund, and ways to reduce liquidation risk.

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What triggers liquidation

Liquidation is triggered when your margin ratio falls at or below the maintenance margin rate: $MR = \frac{M + uPnL}{Q \times P_{mark}} \leq MMR$ As the mark price moves against your position, uPNL decreases, which decreases MR. When MR hits MMR, your position is liquidated.

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Liquidation price

The liquidation price is the mark price at which your margin ratio exactly equals MMR. To find it, substitute the liquidation condition MR = MMR and solve for $P_{mark}$

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Long position

For a long, $uPnL = (P_{mark} - P_{entry}) \times Q$. Setting MR = MMR: $\frac{M + (P_{liq} - P_{entry}) \times Q}{Q \times P_{liq}} = MMR$ Solving for $P_{liq}$: $M + Q \times P_{liq} - Q \times P_{entry} = Q \times P_{liq} \times MMR$ $M - Q \times P_{entry} = Q \times P_{liq} \times (MMR - 1)$ $\boxed{P_{liq}^{long} = \frac{Q \times P_{entry} - M}{Q \times (1 - MMR)}}$ Since initial margin $M = Q \times P_{entry} / L$, this simplifies to: $P_{liq}^{long} = P_{entry} \times \frac{1 - \frac{1}{L}}{1 - MMR}$

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Short position

For a short, $uPnL = (P_{entry} - P_{mark}) \times Q$. Setting MR = MMR: $\frac{M + (P_{entry} - P_{liq}) \times Q}{Q \times P_{liq}} = MMR$ Solving for $P_{liq}$: $M + Q \times P_{entry} - Q \times P_{liq} = Q \times P_{liq} \times MMR$ $M + Q \times P_{entry} = Q \times P_{liq} \times (1 + MMR)$ $\boxed{P_{liq}^{short} = \frac{M + Q \times P_{entry}}{Q \times (1 + MMR)}}$ Substituting $M = Q \times P_{entry} / L$: $P_{liq}^{short} = P_{entry} \times \frac{1 + \frac{1}{L}}{1 + MMR}$

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Worked example - single leverage

Parameters:

• Entry price: $100
• Max leverage selected: L = 10
• Initial margin ratio: IMR = 8.33%
• Maintenance margin ratio: MMR = 5%

Long liquidation price Substitute into $P_{liq}^{long} = P_{entry} \times \dfrac{1 - IMR}{1 - MMR}$ : $P_{liq}^{long} = 100 \times \frac{1 - 0.0833}{1 - 0.05} = 100 \times \frac{0.9167}{0.95} \approx \$96.49$ If the mark price drops to $96.49, your long is liquidated. Short liquidation price Substitute into $P_{liq}^{short} = P_{entry} \times \dfrac{1 + IMR}{1 + MMR}$ : $P_{liq}^{short} = 100 \times \frac{1 + 0.0833}{1 + 0.05} = 100 \times \frac{1.0833}{1.05} \approx \$103.17$ If the mark price rises to $103.17, the short is liquidated.

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The liquidation process

When the mark price reaches your liquidation price:

1. Liquidation is triggered. The liquidation engine takes over your position immediately.
2. Position is closed at best available price. The engine attempts to close your position at or near the current market price. Because TrueCurrent uses a competitive liquidity network, liquidations typically execute close to the liquidation price.
3. Remaining margin is forfeited (if any). When the position is liquidated, the surplus is split between the liquidator and insurance fund.
4. Insurance fund absorbs shortfalls. If the position closes at a worse price than the liquidation price (negative equity), the insurance fund covers the difference. You do not owe beyond your deposited margin.

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Insurance fund

Purpose: The insurance fund ensures that winning traders are always paid in full, even when a counterparty is liquidated at a loss beyond their margin. Accrual: The fund grows whenever a liquidation closes between $P_{liq}$ and $P_{bankrupt}$. The margin buffer captured in that price range (the difference between the position’s equity at $P_{liq}$ and zero) is transferred to the insurance fund, not returned to the trader. Stress events: If an extreme liquidation or manipulated price condition cannot be handled through normal orderbook, RFQ, and liquidator liquidity, Auto-Deleveraging (ADL) can act as a backstop. See the ADL section below. The onchain insurance fund address can be queried on the Injective explorer for real-time balance transparency. Refer to the Injective liquidation documentation for the per-market insurance fund details.

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Auto-deleveraging (ADL)

Auto-deleveraging is a rare backstop for liquidatable positions. Instead of routing a normal RFQ close, the exchange-module mechanism offsets the liquidatable position against existing opposite-side positions in the same market. The most profitable positions at the highest leverage will be prioritized. The offset normally settles at the current mark price. If the mark price has crossed the target position’s bankruptcy price, it settles at that bankruptcy price. ADL does not arrive through TrueCurrent’s RFQ streams, so maker systems should monitor normal onchain derivative trade and position updates for OffsettingPosition executions. For the operational details, close price rules, and how to reduce exposure, see Auto-deleveraging (ADL).

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Avoiding liquidation

Monitor your margin ratio. The Positions panel shows your margin ratio and liquidation price in real time. The closer your mark price is to your liquidation price, the more urgent the situation. Add margin. You can deposit additional USDC to an open position at any time to increase equity and push your liquidation price further away. Reduce leverage. Partially closing a position reduces your notional exposure while keeping the same margin, effectively deleveraging. Use lower leverage. The relationship is direct: at 20× leverage, a 5% adverse move approaches liquidation. At 2× leverage, you’d need a 50% move. Sizing leverage to your risk tolerance is the most effective protection. Watch funding rates. Persistent funding payments drain margin over time. A position that’s safe today may be closer to liquidation tomorrow if funding is running against you. See Funding rates.