Liquidations and Minimum Position

Technical Details on Liquidations and Minimum Amount for Long Positions

Liquidations

In our decentralized Protocol, when a position reaches its liquidation price, it must be closed to ensure the system functions properly. However, as with all decentralized protocols, the Protocol cannot trigger liquidations itself, as it operates on the blockchain and cannot monitor prices in real-time. This is why liquidation must be initiated by an external actor, such as a user or bot, that monitors prices and executes a liquidation transaction. The liquidation action is permissionless and can be triggered by anyone.

In practice, there are two possible scenarios:

1. "Voluntary" Liquidation: Liquidation is typically performed by bots programmed to constantly monitor opportunities. These bots submit a valid price to the Protocol and initiate the liquidation of positions that need to be closed. However, it’s important to note that anyone—not just bots—can take advantage of these opportunities and execute a liquidation, provided they supply a valid price.

2. "Involuntary" Liquidation: A user performs one of the four main actions, such as minting/redeeming USDN or opening/closing a Long position. When they interact with the Protocol by providing a price, the Protocol checks if there are any positions to liquidate. If so, these positions are automatically liquidated, and the user is rewarded.

Triggering a liquidation requires a transaction on the Ethereum blockchain, which incurs gas fees. To ensure that positions marked for liquidation are effectively liquidated, the Protocol financially incentivizes liquidators by refunding gas fees and offering an additional reward. This incentive is made possible through a liquidation penalty built into every Long position, set at approximately 2%. The liquidation price displayed on the website already includes this penalty.

This penalty, subject to change by the Governance, serves to cover the gas fees associated with the liquidation transaction and provide a reward to the liquidator. Depending on the state of the Protocol, any remaining surplus is redistributed to the Dip Accumulator and the Vault. For more information about liquidation fees, please refer to the Liquidation Fees section.

Minimum Position Size

To ensure decentralization and the security of the protocol, a minimum collateral amount, subject to change by the Governance, is required to open a Long position on the USDN Long-Only Perpetual. This threshold is necessary to ensure that the liquidation penalty (generally a couple of percentage points on the liquidation price), leaves a sufficient amount of collateral upon liquidation to cover the gas fees of the liquidator transaction.

By maintaining this minimum amount, we facilitate the participation of users and bots in managing liquidations without centralized intervention, while ensuring the economic viability of these actions. This choice is essential to achieving our decentralization goals while preserving the Protocol’s security and efficiency.

Conclusion

In summary, managing liquidations in a decentralized protocol requires the participation of external actors to ensure the system’s security and stability. By incorporating financial incentives for liquidators and including a penalty in the liquidation price, we ensure that the liquidation process remains efficient and economically viable.

The minimum collateral for Long positions is also crucial to ensure that the remaining collateral covers transaction costs, thereby maintaining the Protocol’s performance while offering attractive opportunities for users and bot operators.