Liquidations

Liquidation is a critical process on Hyperliquid L1 to ensure that traders maintain sufficient collateral and the platform remains solvent. It occurs when a trader’s account equity falls below the maintenance margin required for their positions. The platform uses multiple mechanisms to manage and resolve liquidations effectively, ensuring fairness and stability.

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Overview of Liquidations ⚠️

• Maintenance Margin:

  • Set at half of the initial margin at max leverage.

  • Varies depending on the asset’s maximum leverage (e.g., 1% for 50x leverage or 16.7% for 3x leverage).

• Trigger:

  • Liquidation is initiated when account equity (including unrealized PnL) drops below the maintenance margin.

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Liquidation Process 🔄

1. 📉 Partial or Full Close via Order Book:

   • The Clearinghouse sends market orders to the book to close the position.

   • If the position is fully or partially closed to meet margin requirements:

     • For Cross Margin: Any remaining collateral is returned to the trader.

     • For Isolated Margin: Remaining collateral stays within the isolated position.

2. 🏦 Backstop Liquidation via Liquidator Vault:

   • If the account equity drops below two-thirds of the maintenance margin, the liquidator vault steps in.

   • As part of the HLP strategy, the liquidator vault takes over the position and, on average, generates a profit.

   • Liquidator vault profits are redistributed to the community, unlike traditional venues where profits go to privileged market makers or the exchange operator.

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Liquidation Price Calculation 🧮

The liquidation price depends on leverage, position size, and margin available. For cross and isolated margin, the formula is:

liq_price = price - side * margin_available / position_size / (1 - l * side)

Where:

• price = mark price, calculated from the oracle, ensures fairness by integrating external CEX prices with Hyperliquid’s book state, even during high volatility.

• l = 1 / MAINTENANCE_LEVERAGE

• side = 1 for long positions, -1 for short positions

• margin_available (cross) = account_value - maintenance_margin_required

• margin_available (isolated) = isolated_margin - maintenance_margin_required

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Auto-Deleveraging 🔐

When all other liquidation mechanisms are insufficient to resolve a trader’s negative balance, auto-deleveraging (ADL) is triggered to ensure the platform’s solvency:

1. Triggered Condition:

   • A trader’s account value or isolated position value becomes negative, creating potential bad debt.

2. Process:

   • Traders on the opposite side of the position are ranked by unrealized PnL and leverage used.

   • Positions are closed at the previous oracle price against the underwater trader.

   • This ensures no bad debt is created, and the platform remains solvent.

3. Platform Guarantee:

   • Users with no open positions are never forced to socialize any platform losses.

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Key Takeaways 📝

• Liquidations on Hyperliquid prioritize fairness and transparency, leveraging on-chain mechanisms like the liquidator vault to redistribute profits to the community.

• The mark price, derived from an advanced oracle system, ensures accurate and stable liquidation triggers, even during volatile conditions.

• Auto-deleveraging serves as the ultimate safeguard, protecting the platform from insolvency while maintaining fairness for all users.

By combining these mechanisms, Hyperliquid offers a robust and secure liquidation system that aligns trader incentives with the health of the ecosystem.