Leverage & Liquidations

Leverage

Both makers & takers have the ability to trade in a more capital efficient manner by using leverage. This allows a participant's notional exposure to far exceed the amount of collateral provided. Solvency of the system is ensured by a maintenance margin & liquidation system.

$$\text{MaximumLeverage} = \frac{1}{\text{maintenance}\%}$$

For example: if maintenance is 20%, then 1 / 20% = 5, so 5.0x max leverage.

Maintenance

A maintenance margin is set by the market operator. It is the minimum ratio of collateral to notional exposure that a market will allow. This sets how much notional exposure a maker can provide and how much leverage a taker can get.

If the value of the collateral posted by a maker or taker falls below the maintenance requirement, the maker/taker position will enter liquidation to ensure solvency of the protocol.

Both makers and takers have a maintenance requirement based on the notional of their position times the margin percentage requirement for the product.

Example Product: Long-ETH @ 20% maintenance (up to 5x leverage)

We use ETH = $1000 for this example.

Side	Position	Notional	Maintenance
Maker	10	$10,000	$2,000
Taker	5	$5,000	$1,000

Liquidations

An account can be liquidated whenever its collateral drops below the maintenance requirement of their position.

Like with any other position change, a liquidation must sit in a pending state until the next oracle update. During this period however, a special lock is placed on the account so that the liquidation process may not be interfered with. The user may not open or close a new position (or be liquidated again) until the liquidation process is completely settled and the lock is cleared.

Margin and maintenance requirements are the same: a single value both for opening and keeping open a position.

The maintenance requirement for makers is calculated assuming 100% utilization of their exposure, so for a maker position of 10, even if the net exposure was only 1, 10 is still used as the position in the above equation. Since the utilization can change instantaneously, this is to ensure that we’re taking a worst case approach to the maintenance calculation.

$$\text{maintenanceRequirement} = \max(\text{position} \cdot \text{price} \cdot \text{maintenance}, \text{minMaintenance})$$

minMaintenance is used as a floor on the collateral to ensure that any non-zero position has a sufficient incentive to liquidate in the case of under-collateralization.

Upon successful liquidation, the liquidator is allowed to withdraw up to liquidation fee collateral from the account. This fee is optional, as you may want to self-liquidate, and can be computed as follows:

$$\begin{aligned} &\text{maintenance} = \max(\text{maintenanceRequirement} \cdot \text{liquidationFee}, \text{minMaintenance}) \\ &\text{liquidationFee} = \min(\text{maintenance}, \text{maxMaintenance}) \end{aligned}$$

The liquidationFee is a percentage of the maintenance requirement of the position at time of liquidation, capped above and below by the maxMaintenance and minMaintence respectively.

Reward

Liquidators are immediately granted a liquidation reward equal to the maintenance requirement of the account times the liquidationFee upon the successful initiation of a liquidation.

Example Liquidation: Collateral @ 20% liquidationFee

Collateral	Maintenance	Liquidation Reward
$10,000	$15,000	$3,000
$30,000	$32,000	$6,400
$25,000	$20,000	N/A - cannot liquidate

Perennial does not take a protocol or product owner cut of the liquidation fee.