How do auto liquidations due to price volatility work for margin trades?Last Updated: September 06, 2019
Your trade will get auto liquidated on completion of trade duration or if it falls under critical region, i.e the current token price drops below the liquidation price. Excess collateral will be transferred to Nuo account.
Every trade has a Safe Region, Critical Region, and a Hard Stop. The system continuously monitors active trades to figure out when they need to be auto-liquidated. A trade in Safe Region cannot be auto-liquidated while a trade in Critical Region can be liquidated by one of the multiple relayers tracking active trades in order to liquidate them. Hard Stop denotes the final point after which the borrower will lose more collateral than he committed once the trade stops.
Critical region for a trade is defined by the following inequality.
collateral_currency_price * collateral_amount * stoploss <= (loan_currency_price * loan_amount * (100 + premium + buffer/initial_leverage) - trade_currency_price * trade_amount * 100)
Buffer is set at 10-15% for margin-trades depending on the token involved in the trade. You can check what is the buffer being used while creating your trade.
A trade with 1ETH collateral and 3x leverage is placed at 1% premium for 1 week at 40% stop-loss. Loan currency = DAI and trade currency = WBTC (short DAI long WBTC).
The trade was placed using best rates on partner exchanges in realtime such that
collateral amount = 1ETH,
loan amount at 3x leverage = 750DAI (@250DAI/ETH),
trade amount = 0.1WBTC (@7500DAI/WBTC)
Lets look at 2 instances in time to see if a stoploss would be triggered. Using above inequality (currency prices are with respect to DAI), we get:
T1: 1ETH = 300DAI, 1WBTC = 8000DAI
=> (300) * 1 * 40 <= (1) * 750 * (100 + 1 + 5/3)
- (8000) * 0.1 * 100
=> 12000 <= 77000 - 80000
T2: 1ETH = 200DAI, 1WBTC = 6000DAI
=> (200) * 1 * 40 <= (1) * 750 * (100 + 1 + 5/3) - (6000) * 0.1 * 100
=> 8000 <= 77000 - 60000
T1 represents a trade is Safe Region and wont be liquidated while T2 represents a trade in Critical Region and will be liquidated by workers.
This buffer prevents lenders from losing money in a volatile market by pushing a trade in critical region for on-chain liquidations to happen just before prices drop to the hard stop. Buffer is market dependent and can increase with increasing volatility in crypto markets.