Liquidation & ADL

What happens when your margin is insufficient, and how WaterX handles extreme scenarios.

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Liquidation

Trigger Condition

When your position equity falls below the maintenance margin, the Keeper force-closes your entire position:

Liquidation trigger: Collateral − Unrealized Loss − Accumulated Fees < Maintenance Margin

Maintenance Margin = 1.5% × Position Size

WaterX performs full liquidation — not partial. Once triggered, the entire position is closed.

Liquidation Price

Liquidation Price (Long)  = Entry Price × (1 − Initial Margin Rate + Maintenance Margin Rate)
Liquidation Price (Short) = Entry Price × (1 + Initial Margin Rate − Maintenance Margin Rate)

Example (BTC Long, 10x leverage, entry $60,000):

Initial Margin Rate = 1/10 = 10%
Maintenance Margin Rate = 1.5%

Liquidation Price = $60,000 × (1 − 0.10 + 0.015)
                  = $60,000 × 0.915
                  = $54,900

When BTC drops to $54,900, your position is liquidated.

Example (ETH Short, 20x leverage, entry $3,000):

Initial Margin Rate = 1/20 = 5%
Maintenance Margin Rate = 1.5%

Liquidation Price = $3,000 × (1 + 0.05 − 0.015)
                  = $3,000 × 1.035
                  = $3,105

Post-Liquidation Fund Distribution

1. Insurance Fund Fee = 1% × Position Size
2. WLP = Remaining Collateral − Insurance Fund Fee

Liquidated traders receive no refund. All remaining collateral is distributed to the Insurance Fund and WLP.

Example (continuing BTC Long 10x):

Position Size = $10,000
Initial Collateral = $1,000
Remaining Collateral at liquidation ≈ $150 (≈ maintenance margin)

Insurance Fund Fee = 1% × $10,000 = $100
WLP receives = $150 − $100 = $50

How to Reduce Liquidation Risk

• Use lower leverage (5x–10x instead of 50x)

• Set a Stop-Loss above your liquidation price

• Monitor your margin ratio and deposit collateral when needed

• Avoid high leverage during periods of high volatility

Warning: Liquidation is irreversible. Once triggered, it cannot be cancelled. Monitor your margin ratio at all times.

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ADL (Auto-Deleveraging)

What is ADL

ADL is WaterX's last resort to protect LPs in extreme market conditions. When the Insurance Fund is insufficient to cover bad debt and LP unrealized losses exceed a safety threshold, the system force-closes some profitable positions.

Trigger Condition

ADL triggers when: LP Unrealized Loss > 30% × WLP TVL

When traders are collectively making large profits that push WLP's unrealized loss above 30% of TVL, ADL activates.

Ranking and Execution

1. The system calculates an ADL Score for all positions (weighted by PnL%)

2. Starting from the highest ADL Score, positions are force-closed one by one

3. This continues until the LP unrealized loss ratio drops back below 30%

How to Reduce ADL Risk

• Consider partially or fully closing positions when you have large unrealized profits

• Avoid holding extremely large profitable positions in markets with severely imbalanced OI

Important: ADL may force-close your profitable position without advance warning. This mechanism exists to protect the overall system's solvency.

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Insurance Fund

The Insurance Fund is WaterX's buffer against bad debt from liquidations.

Item	Details
Revenue source	Liquidation Fee: 1% × Position Size
Initial funding	$0 (accumulates from fees)
Purpose	Covers bad debt when liquidation execution price is below bankruptcy price
When depleted	Triggers ADL

The health of the Insurance Fund directly affects how often ADL triggers. A larger fund means lower probability of ADL events.