Liquidation Engine

The liquidation engine protects the pooled LP and keeps markets solvent by fully closing positions that violate margin safety. It acts when a position’s effective equity (collateral adjusted for funding) or status no longer meets requirements, using the DoA index price.

When a position becomes liquidatable:

At evaluation time the engine computes:

• Payout at the current index price (includes trading PnL and funding PnL).

• Remaining collateral = collateralAmount + fundingPnL.

A position is LIQUIDATABLE if any of the following is true:

1. Margin call: remainingCollateral ≤ 0 or payout ≤ liquidationThreshold × remainingCollateral (works with or without leverage).

2. Forced take-profit: payout ≥ maxPayout (the configured cap / profit ceiling).

3. Funding drain: funding fees have consumed the user’s entire collateral (or an admin-set fraction), even if price PnL is positive.

4. Index / token delisted: the relevant index or settlement token is no longer in circulation / disabled.

5. Whitelist removal: the trader’s address has been removed from the whitelist.

The check is performed inside the position evaluation routine; if any rule trips, status returns LIQUIDATABLE.

Full vs. partial liquidation

• The current implementation fully closes liquidatable positions (no partial unwind). The trade’s status becomes CLOSED, market open-interest is reduced, and reserves are reconciled in the Pool.

• Reserve bookkeeping happens via the reserve-adjustment path (unlocking previously locked capacity and settling the LP delta).

Health Factor

The Health Factor (HF) shows how close your position is to liquidation. It ranges from 100% (completely safe) to 0% (fully liquidated) and updates continuously as the index level changes.

How it’s calculated:

1. Measure both liquidation distances. A position might be liquidated for two MAIN reasons ( there are 5 of them in total) - margin call or forced take-profit. The system measures how far the current index level is from each liquidation point.

2. Convert distances to percentages. Each distance is converted to a scale from 0% to 100%, where:

   • 100% = at entry level (safe)

   • 0% = at liquidation level

3. Take the minimum value. The smaller of the two percentage distances determines your Health Factor, since liquidation occurs if either condition is hit first.

$$\text{Health Factor} = \min\bigl(\text{Margin Distance \%},\ \text{Profit Cap Distance \%}\bigr)$$

If you entered a position at level 100 and your liquidation level is 50:

• At level 100, HF = 100% (fully safe)

• At level 50, HF = 0% (liquidated) Between them, the value decreases linearly. So at level 75, HF = 50%, and at level 62.5, HF = 25%

Math TL;DR

• $Payout = collateral + tradingPnL + fundingPnL$ capped by maxPayout.

• Margin call rule: liquidate if payout is too small relative to equity baseline (collateral + fundingPnL) at the configured threshold, or if equity baseline ≤ 0.

• Funding drain rule: liquidate when funding consumes all (or the configured share of) collateral.

• Settlement waterfall: fee is taken from payout and sent to the fee receiver; remainder (if positive) to the trader; Pool reserves are reconciled. The treasury never pays (it only receives protocol fees).