As part of the default settings of the v4 open source software (”dYdX Chain”), accounts whose total value falls below their maintenance margin requirement may have their positions automatically closed by the liquidation engine. Positions are closed via protocol-generated liquidation matches where a protocol-generated liquidation order uses a calculated “Fillable Price” as the limit price to match against liquidity resting on the order book.

Profits or losses from liquidations are taken on by the insurance fund.

A liquidated subaccount may have its position partially or fully closed. v4 open source software includes a liquidations configuration which — as determined by the applicable Governance Community — will determine how much of the position is liquidated.

As part of the default settings of the v4 open source software, when an account is liquidated, up to the entire remaining value of the account may be taken as penalty and transferred to an insurance fund.

The liquidation engine will attempt to leave funds in accounts of positive value where possible after they have paid the Maximum Liquidation Penalty of 1.5%. The 1.5% fee contemplated in the default v4 software will be subject to adjustments by the applicable Governance Community.

This is the price at which a specific position reaches the point of liquidation.

For cross-margining (multiple positions sharing the same margin), the calculation is adjusted to account for the margin used by other positions.

As part of the default settings of dYdX Chain, the “fillable price” (or the limit price of a liquidation order) for a position being liquidated is calculated as follows. For both short and long position:

Fillable Price (Short or Long) = P x (1 - ((SMMR x MMF) x (BA x (1 - Q)))

Where (provided as genesis parameters):

On the other hand, the “Close Price” will be the sub-ticks of whatever maker order(s) the liquidation order matches against.

For more information on Margin fractions and calculations, see https://docs.dydx.exchange/concepts-trading/margin

What price is used to determine liquidations?

As part of the default settings, Oracle Price is used to estimate the value of an account’s positions. If the account’s value falls below the account’s maintenance margin requirement, the account is liquidatable.

Who receives the liquidation fees?

The insurance fund would receive liquidation fees / penalty. Please note that the applicable Governance Community needs to initially fund the insurance fund from the applicable community treasury.

How liquidation engine works?

Our liquidation engine automatically closes positions that fall below the maintenance margin.

Does dYdX apply a penalty in the event of liquidation?

Yes. The liquidation engine will attempt to leave funds in accounts of positive value where possible after they have paid the Maximum Liquidation Penalty of 1.5%. The 1.5% fee contemplated in the default v4 software will be subject to adjustments by the applicable Governance Community.

How to avoid liquidation?

In order to avoid liquidation, you can deposit more assets to your account, as while opening a position the key point is to have enough assets to cover the maintenance margin requirements. You can also close the part of the position and the liquidation price will change.
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