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Liquidations on Hotstuff L1 occur when a trader’s account equity falls below the maintenance margin. All liquidation positions are first attempted to be entirely closed by sending market orders to the orderbook. These orders can either be for the full position or for a portion of it’s size in case on incremental liquidations. In case of multiple positions, liquidation occur only until maintenance margin requirements are met, leaving remaining positions and collateral intact.

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Backstop Liquidations

If a trader’s positions cannot be fully closed through the orderbook, and their account equity falls below two-thirds of the required maintenance margin, backstop liquidation is initiated using HLV’s Liquidator sub-vaults. For cross margin positions, backstop liquidation results in all of the trader’s cross positions and cross margin being transferred to the liquidator. If the trader holds no isolated positions, this will leave their account equity at zero. For isolated margin positions, only the specific isolated position and its corresponding margin are transferred to the liquidator. The trader’s remaining cross margin and other positions remain unaffected. During a backstop liquidation, the maintenance margin is not returned to the trader. This margin acts as a buffer, ensuring that the liquidator vault can perform backstop liquidations profitably on average. To avoid losing their maintenance margin, traders should consider placing stop loss orders or exiting positions before the mark price approaches the liquidation threshold. Note that positions in isolated-only perpetual markets are not backstopped and proceed direct to ADL.

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Auto Deleveraging (ADL)

Auto-deleveraging (ADL) is a critical mechanism that guarantees the ongoing solvency of the platform. When a user’s overall account equity or the value of an isolated position drops below zero, the system intervenes to prevent bad debt. ADL may also be triggered if the backstop vault lacks sufficient capital to take over a user’s cross or isolated positions. In such scenarios, traders with opposite positions are prioritized for ADL based on their unrealized profit and loss as well as the amount of leverage they are using. These prioritized traders will have their positions automatically closed at the prior mark price, offsetting the loss from the underwater account. This process ensures that losses are contained and not absorbed by the platform itself, thereby eliminating the risk of bad debt. ADL acts as the platform’s final layer of protection for system solvency. Importantly, the system guarantees that users without open positions will never be required to share in or cover any platform losses under any circumstances.