Liquidation

To ensure the integrity of the trading system and protect traders from illiquidity or market manipulation, Penals implements the Mark Price mechanism. As a leveraged trading platform for NFT contracts, Penals allows traders to borrow capital to enter positions.

To keep positions open, traders are required to maintain a certain percentage of the position value as the maintenance margin. If the equity of a trader's account falls below the maintenance margin, the account may face liquidation. The liquidation process is as follows:

Account Equity = Wallet Balance + Unrealized PnL

Please note that the maintenance margin is subject to real-time market prices and may change accordingly. To avoid liquidation, traders have the option to either add more margin to their positions or reduce their positions by closing some of them. Failing to take corrective action when the equity falls below the maintenance margin will result in the liquidation of the positions, and the maintenance margin will be added to Penals' insurance fund pool.

When a trader's account equity reaches the maintenance margin level, which is also the point where the Mark Price and the Last Price converge, liquidation is triggered. Penals aims to minimize the impact of liquidation by following these steps in cross-margin mode:

1. Traders' positions are taken over by Penals, and traders lose control over their accounts, including the ability to place or cancel orders, and deposit, or withdraw funds.

2. Penals cancels any open orders of the contract to free up margin and reduce risks.

3. Position netting occurs, where a trader's long and short positions under the contract are offset to mitigate risks.

If the above protective measures are insufficient to fulfill the required maintenance margin, Penals' liquidation engine will place a limit order, known as a liquidation order, to close the positions at the bankruptcy price.

In the event that Penals is able to liquidate the position at a price better than the bankruptcy price, any remaining collateral will be added to the insurance fund. However, if the liquidation order cannot be completed at a price better than the bankruptcy price, and the order remains unfilled, the trader's account will go bankrupt, resulting in negative equity. In such cases, the insurance fund will cover the debt and balance the account back to zero.

In extreme situations where the liquidation order still cannot be closed, Penals may trigger Auto-Deleveraging (ADL) as a last resort.

By implementing these measures, Penals aims to maintain a fair and secure trading environment for leveraged NFT contracts, ensuring the protection of traders' funds and minimizing the risk of liquidation.