Understanding Liquidation
Liquidation occurs when a trader's losses bring their margin below the minimum required to maintain their position. At this point, the protocol automatically closes the position to prevent further losses that could impact other participants.
The liquidation process typically works as follows: 1. Market moves against your position 2. Your margin ratio falls below the maintenance margin requirement 3. Your position is forcibly closed, partially or fully 4. A liquidation fee is charged, which goes to liquidators or the insurance fund
Different protocols have different liquidation mechanisms. Some use incremental liquidations (closing just enough to bring margin back above requirement), while others may liquidate the entire position.
For RWA perpetuals trading with high leverage, understanding liquidation prices is crucial. Many platforms show your liquidation price when opening a position. Traders should: - Monitor their margin ratio - Set appropriate stop losses - Avoid maximum leverage without understanding the risks - Consider the volatility of the underlying RWA
Cascading liquidations, where multiple positions get liquidated in succession, can cause rapid price movements and increased volatility.