> For the complete documentation index, see [llms.txt](https://docs.fluvion.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.fluvion.io/perpetual-futures-mechanics/liquidations.md).

# Liquidations & Risk Engine

Liquidation is an automated safety process designed to protect the exchange, market participants, and overall protocol solvency when a trader's account margin is insufficient to support their open positions.

***

## When Does Liquidation Occur?

An account or isolated position enters liquidation when its **Account Margin Ratio (AMR)** drops below its required **Maintenance Margin Ratio (MMR)**:

```
Liquidation Condition: Account Margin Ratio < Maintenance Margin Ratio
Account Margin Ratio = Total Collateral Value / Total Notional Position Value
```

> \[!IMPORTANT] **Mark Price Protection**: All margin ratios and liquidation thresholds are evaluated strictly against the **Mark Price**, not the Last Traded Price. This completely eliminates the danger of predatory wick-hunting, where artificial price swings on a single venue might otherwise trigger premature liquidations.

***

## The Non-Cascading Liquidation Advantage

On traditional centralized exchanges, liquidations are executed by force-dumping market orders directly into the orderbook. During high-volatility crashes, this triggers a devastating **cascading feedback loop**:

```
[Forced Market Dump] -> [Price Crashes Further] -> [Triggers More Liquidations] -> [Vicious Spiral]
```

### Fluvion's Decentralized Position Transfer:

Fluvion does **not** dump liquidating positions onto the open orderbook. Instead, liquidating positions are transferred directly to whitelisted **Liquidators** at a predefined discount.

* **Zero Slippage on Orderbook Depth**: Normal trading books remain calm and stable.
* **Structured Resolution**: Positions are absorbed without causing market panic or liquidity drain.

***

## The Liquidation Execution Flow

```mermaid
flowchart TD
    Step1[1. Detection\nAMR falls below required MMR] --> Step2[2. Cancel & Freeze\nAll open resting orders are cancelled\nAccount actions frozen]
    Step2 --> Step3[3. Minimum Reduction Sizing\nCalculate minimum size to restore AMR >= IMR\n(Partial liquidation priority)]
    Step3 --> Step4[4. Liquidator Transfer & Settlement\nLiquidators claim positions at discount\nFees split with Insurance Fund]
    Step4 --> Step5{Account Solvency Check}
    Step5 -->|Positive Equity Remains| Step6[Account unfreezes\nTrader keeps remaining balance]
    Step5 -->|Equity < 0 (Bankrupt)| Step7[5. Insurance Fund absorbs deficit\nLiquidators paid from Insurance Fund]
    Step7 -->|If Insurance Fund Exhausted| Step8[6. Auto-Deleveraging (ADL)\nProfitable counterparties deleveraged]
```

### Step 1: Detection

The off-chain risk engine continuously monitors account equity and detects that the Account Margin Ratio has breached the required MMR threshold.

### Step 2: Cancel Open Orders & Freeze Account

1. All resting limit orders, stop triggers, and conditional orders are immediately cancelled to free up reserved margin.
2. The account's collateral withdrawals and transfers are temporarily locked.

### Step 3: Partial Liquidation Calculation

Rather than automatically wiping out the trader's entire portfolio, the risk engine calculates the **minimum position size** that needs to be transferred to bring the account's AMR back above the safe **Initial Margin Ratio (IMR)**.

### Step 4: Position Transfer & Liquidation Fee

Liquidators take over the designated position slice. A liquidation fee is deducted and split between the **Liquidator** and the **Insurance Fund**:

| Market Tier      | Markets          | Liquidation Fee | Liquidator Share | Insurance Fund Share |
| ---------------- | ---------------- | :-------------: | :--------------: | :------------------: |
| **Major Tier**   | SOL, BTC, ETH    |    **0.60%**    |       0.30%      |         0.30%        |
| **Altcoin Tier** | Altcoins & Memes |    **1.20%**    |       0.60%      |         0.60%        |

***

## Insurance Fund & Auto-Deleveraging (ADL)

### 1. The Insurance Fund

The **Insurance Fund** serves as the primary capital backstop for platform solvency. It is funded by the protocol's share of liquidation fees.

* If an account experiences extreme slippage and becomes **bankrupt** (total account equity drops below zero before liquidators can absorb the position), the Insurance Fund steps in to absorb the deficit.
* The trader is never pursued for negative debt, and counterparties are paid in full.

### 2. Auto-Deleveraging (ADL)

In the extraordinarily rare event that extreme market turmoil depletes the Insurance Fund entirely, the platform activates **Auto-Deleveraging (ADL)** as the ultimate backstop.

* ADL automatically closes out bankrupt positions against the most profitable and highest-leveraged counterparty traders.
* Traders can monitor their **ADL Priority Indicator** (a 5-bar meter displayed on their active position card in the Web UI). Higher profit and higher leverage place a position higher in the ADL ranking.

***

## How to Avoid Liquidation

1. **Maintain Adequate Margin**: Monitor your **Account Margin Ratio (AMR)** in the dashboard and deposit additional USDC collateral well before approaching MMR.
2. **Use Lower Leverage**: Lower leverage (e.g., 5x–10x instead of 50x–100x) creates a much wider safety buffer between your entry price and liquidation price.
3. **Always Set Stop-Loss (SL) Orders**: Attach a Stop-Loss trigger to every position. An SL order will automatically close your trade at a controlled loss before liquidation thresholds are ever reached.
4. **Utilize Isolated Margin**: For high-risk speculative trades, switch to **Isolated Margin** mode so that any potential loss is strictly confined to the allocated trade collateral without endangering the rest of your account.


---

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