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Perpetual futures trading is a type of futures contract that has no expiration date. Instead, it is designed to mimic the spot market, with traders taking long or short positions on the underlying asset. Because of this, perpetual futures trading can be highly leveraged, with traders often using borrowed funds to amplify their returns. However, this also means that liquidations can occur quickly and with significant losses if not managed properly.
Liquidation refers to the process of closing out a position in a financial market. In perpetual futures trading, liquidation typically occurs when a trader's margin balance falls below the maintenance margin. Margin balance is the sum of a wallet balance and unrealized PnL, while maintenance margin is the minimum amount of margin traders must maintain in order to keep their futures position open. This can be triggered by adverse price movements or changes in market conditions. Here at JOJO, your position will be liquidated if the mark price reaches the liquidation price. There are several factors that can influence this threshold, including the leverage used, the maintenance margin rate, the cryptocurrency’s current price, and the trader’s remaining account balance.
In a full-position margin system, if the net value of a user's account falls below the maintenance margin when your position moves in the opposite direction of the latest transaction price, your position may be forcibly closed to protect the trader's loss from exceeding the deposited margin.
- In JOJO's perpetual futures trading system, the user's position margin will be liquidated if a contract with USDC or JUSD as collateral is liquidated.
- In JOJO's multi-collateral system, if non-stable coin collateral (WBTC, WETH, or ARB) for JUSD collateralized loans is forced to close due to fluctuations in token market prices, the user's collateral (WBTC, WETH, or ARB) is being liquidated.
Generally, when a trader trades, orders with insufficient maintenance margin will be forced to close or liquidate. The forced closing and liquidated orders are sell orders during a drop, pushing the transaction pair's trading price to fluctuate. These orders will have a 0.01 discount (Liquidation buffer, this parameter may change in the future, please refer to JOJO's announcement for updates.) to encourage the order to be taken by other people (liquidators) in the same direction in JOJO's matching engine. The remaining 0.04 (This parameter may change in the future, please refer to JOJO's announcement for updates.) of the margin enters JOJO's insurance fund. If there is still a surplus, it will remain in the liquidated user's account. The design logic of the liquidation buffer is to encourage liquidators to take orders with a risk ratio > 1 at a more competitive price to reduce the platform's bad debt risk. During this process, if the market changes too much and these orders cannot be digested, it will cause a system under-collateralization. At this time, JOJO's insurance fund will intervene to compensate, and users do not need to compensate.
Additionally, if a trader uses JOJO's multi-collateral system, pledges WBTC, WETH, or ARB to borrow JUSD, and then uses this JUSD for trading, they may also face the risk of being liquidated if their maintenance margin is insufficient. In this case, since the margin used for opening the position comes from JUSD borrowed from collateralized loans, the JUSD borrowed by the user will be liquidated when their position is forcefully closed.
It is important to note that since the collateral used in JOJO's multi-collateral system is non-stable coins, the price of these currencies will change with market fluctuations. When the market is highly volatile, a user's collateral may also face the risk of being liquidated.
As a perpetual contract trading platform, JOJO's system health largely depends on the health of various trades conducted using the platform. When all traders have enough margin to trade in a volatile derivative market, the entire JOJO system has sufficient bad debt resistance, meaning JOJO's system is running healthily.
When a trader's position risk is too high, the bad debt risk of the entire system increases, and if too many traders engage in high-risk trading, JOJO's own risk also increases.
Therefore, JOJO's system requires a liquidator role. Liquidators will liquidate unhealthy positions (risk ratio > 1) and buy the liquidated trader's position with a 0.01 discount in the same direction.
Note that all open orders will be immediately canceled in the forced liquidation process.
User Jotaro used his test sub-account to buy 1.127032 BTC/USDC and 3 ETH/USDC short positions with entry prices of 27352.76 and 1843.5, respectively.
At this time:
The market sentiment was bullish, and the mark prices of BTC/USDC and ETH/USDC continued to rise, reaching 28295.04 and 1866.9. At this point, we can see from the figure below that Jotaro's risk ratio had climbed to a dangerous 94.64%.
Still, Jotaro did not choose to close his position to stop the loss but continued to hold it. Soon, the risk ratio of Jotaro's test sub-account reached 100% and entered the liquidation process.
If we check Jotaro's liquidation transaction records, we can clearly see the liquidation status of Jotaro's BTC/USD and ETH/USDC positions in the ‘test’ sub-account:
BTC/USDC Liquidation transaction of Jotaro: https://arbiscan.io/tx/0xcd125d8d5cde9289d6b111278258ca20b4fcd0207e862dcc9a8e205a7a05e5e4 ETH/USDC Liquidation transaction of Jotaro: https://arbiscan.io/tx/0x3e1e3e6fafff36df6586b871e01a5d19db5c741d6807f329779c83addb4fccf6
During the liquidation of both of Jotaro's positions:
- JOJO's system will try to sell Jotaro's position at a discounted price based on the mark price. If Jotaro's position is long, then the liquidation of Jotaro's position is equivalent to the liquidator taking over the liquidated position at a lower price, i.e.,
mark price * (1-price off); if Jotaro's position is short, then the liquidator taking over the position will be at a higher price, i.e.,
mark price * (1+price off). Anyone interested in this transaction can join the liquidation and be called a ‘liquidator.’ JOJO's price off is 0.01 (This parameter may change in the future, please refer to JOJO's announcement for updates.).
- During the liquidation of Jotaro's position, the liquidator first bought Jotaro's BTC/USDC short position for
28,689.50, calculated as
28,405.45 * 0.01 + 28,405.45. Then, the liquidator bought Jotaro's ETH/USDC short position for
1,982.61, calculated as
1962.98 * 0.01 + 1962.98（please notice that the 0.01 liquidation buffer may change in the future. Please refer to JOJO's announcement for updates.).
- In addition, 0.04 (This parameter may change in the future, please refer to JOJO's announcement for updates.) of Jotaro's position margin will be recharged into JOJO's Insurance Fund, and this insurance fund will be used to compensate for under-collateralization in extreme market conditions.
- After the liquidation process is complete, Jotaro's position still has 54.28 USDC remaining, which will be left in Jotaro's account.
To avoid being liquidated, it's important to understand the risks associated with your investment and to manage your position carefully. Here are some tips to help you avoid liquidation:
- 1.Set stop-loss orders: A stop-loss order is an order to sell your position if the price falls below a certain level. Setting a stop-loss order can help you limit your losses and avoid being liquidated.
- 2.Monitor your position: It's important to monitor your position regularly to ensure that you are not at risk of being liquidated. Keep an eye on the price of the asset you are invested in and be prepared to take action if necessary.
- 3.Manage your leverage: If you are using leverage to trade, it's important to manage your position carefully. JOJO can provide up to 10x leverage, make sure you understand the risks associated with leverage and use it responsibly.
- 4.Diversify your portfolio: Diversifying your portfolio can help you spread your risk and avoid being overly exposed to any one asset. Consider investing in a variety of assets to reduce your risk of being liquidated.
- 5.Stay informed: Keep up to date with the latest news and developments in the market to ensure that you are aware of any potential risks or opportunities. This will help you make informed decisions and avoid being caught off guard.
Remember, investing always carries some level of risk, and there is no guaranteed way to avoid being liquidated. However, by following these tips and managing your position carefully, you can reduce your risk and increase your chances of success.