Liquidations

If a user's balance becomes too low relative to their collateral, their positions will be exited at a pre-agreed liquidation price by VDEX. This is to ensure that a user's individual account remains solvent. For a leveraged account, a user maintains an initial margin, equal to the total value of the user's deposits (excluding isolated positions), and a maintenance margin, equal to half of the initial margin at maximum leverage.

If the maximum leverage of an asset was 20x, then the initial margin would be 1/20, or 5%, and the maintenance margin would be half of this, or 2.5%.

The user's balance starts out at the initial margin. If, through leverage or short positions, the account balance decreases by 50% and falls below the pre-agreed maintenance margin, then VDEX will begin to exit these positions until the account is de-leveraged.

In liquid markets, once the account balance is no longer below the maintenance margin, the remaining positions will continue to exist and the user's losses will equate to the position losses. However in illiquid markets, it is possible that account equity will decrease too fast below the maintenance margin. In this scenario, the VDEX Market Maker (VMM) will take control of the positions and liability of further losses.

It is important to note that liquidations are calculated based on oracle prices, yet poor orderbook liquidity, especially at high leverage, could mean that market orders hitting the actual bid and ask prices could mean the final price is significantly worse than the oracle price. It is for this reason that there is a buffer between the initial margin and maintenance margin. It is also for this reason that at a certain point, 2/3 of the maintenance margin, VMM must take control of the positions. So, if the sale of assets in illiquid markets resulted in 1/3 of position losses, all of the collateral and positions will be transferred to VMM, take liability for further losses, and user equity will return to zero (assuming no isolated positions.

Isolated positions create separate sets of initial and maintenance margin so that liquidations in the main account, or other isolated positions, will not affect specific trades.