Risk Basics
How Liquidation Works on Decentralized Perpetual Exchanges
Liquidation is the forced reduction or closure of a leveraged position when account equity no longer satisfies a venue's margin rules. This article is educational research only, not financial advice, not a recommendation, and not a signal to trade or use leverage.
What Triggers Liquidation?
A perp DEX usually tracks account equity against an initial margin requirement and a lower maintenance margin requirement. If losses, fees, funding, or collateral changes push equity below the maintenance threshold, the account may be liquidated according to the venue's rules.
- Mark price: The venue's risk engine may use an oracle, index, or mark price rather than the last traded price.
- Maintenance margin: The minimum equity level needed to keep the position open can vary by market and position size.
- Fees and funding: Trading fees, borrow costs, funding payments, and keeper incentives can reduce margin over time.
- Collateral value: Volatile collateral can fall while the position also moves against the account.
What Happens During The Process?
Liquidation rules are venue-specific. Some systems partially reduce a position, some close it fully, and some use insurance funds or auto-deleveraging when losses exceed available margin. The important research task is to understand the exact process before funds are deposited.
- Check whether liquidations are partial, full, or tiered by position size.
- Review who can trigger liquidation and how keepers or liquidators are compensated.
- Look for insurance fund, bad debt, and auto-deleveraging documentation.
- Confirm how pending orders, cross-margin accounts, and multiple positions interact during stress.
Risk Review Questions
Liquidation distance is not a complete risk plan. It can move as margin, collateral value, funding, fees, and venue parameters change. Treat it as one input in a broader risk review, not as a promise that an account can exit safely before forced closure.
- What price source controls margin calculations, and how often is it updated?
- How does the venue handle market gaps, oracle delays, sequencer downtime, or keeper congestion?
- What happens if collateral and position value decline at the same time?
- Where are the current margin tables, liquidation fees, and emergency procedures documented?