Liquidations

GX Exchange uses a progressive liquidation system designed to minimize user losses while protecting the exchange from systemic risk. The system employs partial liquidation with cooldown periods, full liquidation as a backstop, and an insurance fund to absorb residual losses.

Liquidation Trigger

A position is eligible for liquidation when the account’s equity falls below its total maintenance margin requirement:

if equity < sum(maintenance_margin for all positions):
    trigger liquidation

Equity is calculated as:

equity = collateral + sum(unrealized_pnl for all positions)

Partial Liquidation

For positions with notional value exceeding $100,000, the system uses partial liquidation to give traders a chance to add margin or for the market to recover:

Step 1: Initial Partial Liquidation (20%)

• The system liquidates 20% of the undercollateralized position as a market order
• The remaining 80% of the position is preserved
• A 30-second cooldown begins

partial_size = position_size * 2,000 / 10,000    // 20% = 2000 bps
partial_size = max(partial_size, 1)               // at least 1 unit

Step 2: Cooldown Period

• During the 30-second cooldown, the account is monitored but not further liquidated
• This window allows the trader to deposit additional margin or for price recovery
• If the account returns to a safe margin ratio during cooldown, no further action is taken

Step 3: Backstop (Full Liquidation)

• If the account is still undercollateralized when checked during the cooldown window, the entire remaining position is liquidated immediately
• After the cooldown expires, if the account is still undercollateralized, another 20% partial liquidation cycle begins

Small Position Liquidation

Positions with notional value at or below $100,000 are liquidated in full immediately. Partial liquidation on small positions would create excessive overhead for minimal benefit.

Liquidation Price

All liquidation fills execute at the current mark price. The mark price (median of oracle + EMA, book median, and external perp median) ensures fair execution even during volatile conditions.

Insurance Fund

The insurance fund serves as the counterparty of last resort:

1. When a position is liquidated, realized PnL is applied to the account’s collateral
2. If the account’s collateral goes negative after liquidation (bankrupt), the insurance fund absorbs the deficit
3. The insurance fund is replenished by trading fees

if account.collateral < 0 after liquidation:
    insurance_fund += account.collateral   // negative value reduces fund
    account.collateral = 0                 // reset to zero

Post-Liquidation: ADL

If the insurance fund is depleted and an account remains bankrupt, the system triggers Auto-Deleveraging (ADL) to close the position against profitable counterparties. See Auto-Deleveraging.

Liquidation Flow Summary

Account falls below maintenance margin
    |
    v
Position notional > $100K?
    |           |
   YES         NO
    |           |
    v           v
Liquidate 20%  Liquidate 100%
    |           |
    v           v
30s cooldown   Apply PnL to collateral
    |           |
    v           v
Still under-   Bankrupt?
collateralized?    |
    |         YES -> Insurance fund absorbs
   YES             |
    |         NO  -> Done
    v
Full liquidation
    |
    v
Bankrupt? -> Insurance fund -> ADL if fund depleted

Cooldown Tracking

The liquidation engine maintains a per-position cooldown tracker keyed by (account, market). Cooldown records are periodically cleaned up to prevent unbounded state growth.