Leverage & Liquidation
When traders engage with leveraged positions, they amplify potential profits and risks. Leveraged trading means the exchange lends a portion of the trading amount, multiplying the position's exposure to market fluctuations. Given this amplified exposure, price volatility can rapidly erode a trader's capital. If the value of a position deteriorates to the point where it threatens the safety margin, the exchange intervenes by automatically and forcibly liquidating the trade. This intervention ensures that the trader's losses don't exceed their invested margin.
Here's a simplified breakdown:
Low Leverage: Provides a buffer against minor market corrections. Liquidations are less immediate and offer traders more room to navigate market swings.
High Leverage: Makes positions more vulnerable. Even minor price fluctuations can trigger a liquidation, potentially causing a trader to lose their initial investment.
Key Takeaways for Traders:
Leverage Amplifies Risk: While it can boost potential returns, it simultaneously increases susceptibility to market volatility and liquidations.
Maintain Adequate Margins: Ensuring sufficient margins can act as a cushion against abrupt market downturns, staving off premature liquidations.
Choose Less Volatile Assets: Assets vary widely in terms of volatility, and assets with higher swings will have higher liquidation risks.
Stay Vigilant: Regularly monitor open positions, especially when leveraging, to preempt unexpected liquidations and protect invested capital.
Risk Parameters
BTC-PERP
0.05
0.025
ETH-PERP
0.05
0.025
Risk parameters of collateral on Aark are identical to those of Aave. This has two benefits:
Aark inherits Aave’s multi-years battle tested parameters that have successfully dealt with the worst of black swans and mass liquidations.
Liquidators that have built algorithms based on Aave’s parameters can easily expand to becoming liquidators on Aark without having to input additional time to alter their strategies.
Position Liquidation
If the Account Value of a user falls below the Maintenance Margin Requirement, the position will become vulnerable to liquidation. The liquidation price will be determined by price feeds obtained from a Chainlink oracle, and the position will be liquidated at the price provided by the oracle.
It is imperative for Aark Digital to ensure that a liquidated position's USDC balance remains above zero. Depleting this balance could result in inaccurately distributing losses to LPs. Should liquidation scenarios lead to where a trader's position has negative balances, the account is then deemed insolvent. Consequently, the account's positions would have been closed at a deficit, introducing bad debt into the system.
To tackle such bad debt, Aark Digital introduces the Insurance Fund.
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