🌊Liquidation

Zeno implements a rigorous risk management process to help protect both the traders and the market makers, and ensure fairness for both parties. To understand how the liquidation process works, please first familiarize yourself with the terms below:

Initial Margin Requirements (IMR): The Initial Margin Requirement is the USD value of equity required to open a position or increase position size. Each market will have a parameter called “Initial Margin Fraction” (IMF), which is a percentage of position size to be treated as IMR for that position. The IMR is displayed in USD.

Initial Margin Fraction (IMF): The Initial Margin Fraction is a parameter set by Zeno, and is used to determine the initial margin requirement. It is displayed as a percentage & different asset classes will have different IMF.

Maintenance Margin Requirements (MMR): The Maintenance Margin Requirement is the USD value of equity required to maintain the position before it is liquidated by the platform. Each market will have a parameter called “Maintenance Margin Fraction” (MMF), which is a percentage of position size to be treated as MMR for that position. The MMR is displayed in USD.

Maintenance Margin Fraction (MMF): The Maintenance Margin Fraction is a parameter set by Zeno, and is used to determine the Maintenance Margin Requirement. It is displayed as a percentage & similar to IMF, the MMF will be different for different asset classes.

Equity Value: The Equity Value is the net value of your sub-account. It is the summation of unrealized profits/losses, unrealized fees (funding/borrowing/position opening/closing/liquidation), and collateral value.

Collateral Value: The Collateral Value is calculated based on the collateral assets and their respective market prices multiplied by the collateral asset LTV.

Now, let's take an example of Bob, who deposited 1 BTC as collateral to leveraged trade on Zeno. For this example, let's assume the following:

• Bob’s Collateral: 20,202.02 m.USDC

• m.USDC Price: $1.00

• m.USDC LTV: 0.99

• Collateral Value: $20,000.00 USD

• Equity Value: $20,000.00 USD

• Crypto Asset Initial Margin Fraction (IMF): 1.00%

• Crypto Asset Maintenance Margin Fraction (MMF): 0.50%

• Initial Margin Requirement: $200.00 USD (20,000 * 1%)

• Maintenance Margin Requirement: $100.00 USD (20,000 * 0.5%)

Bob then decided to open two leveraged long positions on ETH and ARB on Zeno. Note that for this example, we will ignore fees accrued to the leveraged positions for the sake of simplicity. Below are the relevant info of Bob's two positions at the time of position opening:

• ETH Price: $1,700.00 USD

• ARB Price: $1.20 USD

• ETH Position Size (ETH): 40.00 ETH

• ARB Position Size (ARB): 40,000.00 ARB

• ETH Position Size (USD): 40 * 1,700 or $68,000.00 USD

• ARB Position Size (USD): 40,000 * 1.20 or $48,000.00 USD

• ETH Position PnL: 0.00 USD

• ARB Position PnL: 0.00 USD

• Net Position PnL: 0.00 USD

Two days later, ETH price appreciated to $1,780/ETH while ARB price dropped to $0.65/ARB. At this point, the following statistics represent Bob's account & positions:

• ETH Price: $1,780.00 USD

• ARB Price: $0.65 USD

• ETH Position Size (ETH): 40.00 ETH

• ARB Position Size (ARB): 40,000.00 ARB

• ETH Position Size (USD): 40 ETH * $1,780 or $71,400.00 USD

• ARB Position Size (USD): 40,000 ARB * $0.65 or $26,000 USD

• ETH Position PnL: $71,400 - $68,000 or $3,400

• ARB Position PnL: $26,000 - $48,000 or -$22,000

• Net Position PnL: -$22,000 + $3,400 = -18,400

• Equity Value: 20,000 - 18,400 = $1,600

At this point, while the price of ARB dropped significantly, Bob's Equity Value ($1,600) is still higher than both the Initial Margin Requirement ($200) and the Maintenance Margin Requirement ($100). Therefore, Bob can still freely withdraw his collateral (up to $1,400) and his account will not be liquidated for the time being.

A day later, the price of ARB and ETH moved to $0.91 and $1,495 respectively. At this point, the following statistics represent Bob's account & positions:

• ETH Price: $1,495.00 USD

• ARB Price: $0.91 USD

• ETH Position Size (ETH): 40.00 ETH

• ARB Position Size (ARB): 40,000.00 ARB

• ETH Position Size (USD): 40 ETH * $1,495 or $59,800.00 USD

• ARB Position Size (USD): 40,000 ARB * $0.91 or $36,400 USD

• ETH Position PnL: $59,800 - $68,000 or -$8,200

• ARB Position PnL: $36,400 - $48,000 or -$11,600

• Net Position PnL: -$22,000 + $3,400 = -19,800

• Equity Value: 20,000 - 19,800 = $200

At this point, Bob's Equity Value ($200) has reached the Initial Margin Requirement ($200) but has not reached the Maintenance Margin Requirement ($100). Therefore, a limit on collateral withdrawal has been placed on Bob's sub account, but his sub account is not yet liquidated.

A few minutes later, the price of ARB and ETH moved again to $0.90 and $1,500 respectively. Below is the updated statistics of Bob's account and his positions:

• ETH Price: $1,500.00 USD

• ARB Price: $0.90 USD

• ETH Position Size (ETH): 40.00 ETH

• ARB Position Size (ARB): 40,000.00 ARB

• ETH Position Size (USD): 40 ETH * $1,500 or $60,000.00 USD

• ARB Position Size (USD): 40,000 ARB * $0.90 or $36,000 USD

• ETH Position PnL: $60,000 - $68,000 or -$8,000

• ARB Position PnL: $36,000 - $48,000 or -$12,000

• Net Position PnL: -$8,000 + $12,000 = -20,000

• Equity Value: 20,000 - 20,000 = $0

At this point, Bob's Equity Value dropped below the Maintenance Margin Requirement. As a result, his sub account is liquidated, and the remaining collateral (if any) is returned to him.

Note that for the simplicity of this illustration, we’ve ignored the fees accrued by the trader.