Liquidation Mechanism

The liquidation mechanism exists to prevent a user's trading account from becoming too risky and to ensure that the losses do not exceed the user's account balance, hence keeping the overall system safe.

The OptiFi liquidation process is a true innovation in DeFi. We believe this is one of the key steps to bring competitiveness of centralized platforms to broker-based trading platforms that provide great user experience and cost-effectiveness.

Unlike other DeFi exchanges, OptiFi promotes FAIR and a gradual liquidation process. Instead of liquidating all of the user's account using 3rd party liquidators which receive disproportionate rewards from liquidated accounts, OptiFi implemented an automated liquidation process based on gradual risk reduction of the account.

We believe this introduces a wider range of possibilities for professional investors or high-net-worth accounts which seek safeguards and protections for their positions and accounts in the events of market stress or times where liquidity position of the user is constrained.

OptiFi liquidation process is started when account collateral to margin requirement ratio falls below 90% (Account Equity / Margin Requirement < 90%). Liquidations are done using the following principles:

  • Position liquidations happen gradually, to bring the account to acceptable risk level instead of liquidating all of the user's positions. This ensures fair treatment of platform users, giving users ability to maintain at least some exposures

  • Liquidations happen by canceling all open orders first and then reducing the riskiest positions

  • The quantity of liquidated positions is calculated in order to bring the available collateral back to 130% of the margin requirement (Account Equity / Margin Requirement = 130%)

  • OptiFi liquidations happen in the open market (OptiFi orderbook) which ensures fair liquidation and pricing for all users

  • Safeguards and emergencies are set up for OMM to acquire positions from the users at fair price in case there is not enough liquidity for a given instrument on the orderbook

Liquidation processes are kicked-off by crankers, which only receive rewards with 2% of liquidated asset value (premium) for kickstarting processes and are indifferent to the state of the account as they always receive the same reward by cranking, regardless of the state of the account, its balance, or number of the positions that are liquidated.

OptiFi margin calculation engine already takes into account net premium and net intrinsic values of the options collateral. Therefore, available collateral is strictly defined by what USDC is available in the user's account (Available Balance). It is user's responsibility to track margin requirements and to ensure that at all times USDC balance is sufficient to support account positions.

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