5 sats \ 4 replies \ @Jel 28 Oct 2022 \ on: Kollider AMA bitcoin
What happen in the event that the there is not enough liquidity in the orderbook to find some one to take over a forced liquidated position? I assume that there always need to be two parties (who ‘betting’ against each other) for every position. So is there a possibility that a position is not backed by a other party because of a dried up orderbook? For example, if the market collapse or a big internet malfunction take place.
Currently the risk engine works like this. If a position gets liquidated then the risk engine tries to:
- Find another person in the market to take on the position (best case scenario).
- If there is no one that takes on the position at the liquidation price or better then the insurance fund will pay for the difference.
- If the insurance funds is depleted and no other person is in the market then automatic deleveraging takes place. This means that positions of winners are force closed (worst case scenario).
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In the event of forced liquidation, the insurance fund will cover progressive offloading of the position. If that doesn't happen (or if the insurance fund is insufficient to do so) auto deleveraging kicks in with fill-or-kill orders to minimize liquidation ripple effects.
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Just to check if I get this right. Let’s say that I’m long on Bitcoin (A). I open a position by placing a limit order in the orderbook. Then person (B) fulfils this order and takes a sort position.
Bitcoin goes to the Moon and the position of person (B) need to be liquidated. In the orderbook there is no liquidity to take over his position. So auto deleveraging kicks in and will kill my (A) position as well. I will get the available margin form B and, if possible/needed, funds from the insurance fund.
I assume that this auto deleveraging system will prevent that I will make any lose up to that moment. After the auto deleveraging I have no position anymore. So, from that moment I have no position to profit form any further increase.
Hopefully, I understand that well. I understand that this would be an exceedingly rare event.
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Yeah that is exactly right. Also an interesting note here. If the person that goes short against your long is only levered 1x, then that person cannot get liquidated. This is because of the price convexity of an inversely priced perpetual swap. The liquidation price of a 1x short is infinity.
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