Liquidations

A liquidation event happens when a trader's positions move against them, causing their account balance to fall below the required maintenance margin.

When the account balance dips below the maintenance margin, the system places market orders to partially close the position and bring the balance back above the maintenance margin. Any remaining collateral is returned to the trader, and the liquidation price is updated to reflect the change.

However, if the market moves so unfavorably that the account balance turns negative, the position enters bankruptcy zone. The insurance fund steps in to cover the difference once the position is fully closed, ensuring that the trader doesn’t owe more than their balance.

Instead of seizing funds from liquidations, Hibachi only charges a small liquidation fee, aligning the platform with users and inhibiting incentives to have the user liquidated. This fee is solely used to grow the insurance fund and ensure the exchange's solvency.

The liquidation engine calculates the quantity of a (set of) positions that needs to be closed to bring the account health back to a healthy risk score target. The target is defined as risk score of 0.99

• If after liquidation order(s) are filled, and the risk score is still unhealthy, it will repeat the process until the account’s position is brought back to the healthy risk score target.

• In this way, the liquidation process may only partially liquidate a user’s position. Specifically, it may not liquidate all contracts and it may not fully liquidate a position in a single contract.

Liquidation price displayed in the app is the price that will start triggering a partial liquidation, it is not the price that would close the entire user’s position.

Every time partial liquidation occurs, the liquidation price is re-computed to reflect the new state of the account.