Liquidation

What triggers liquidation?

Your account becomes liquidatable when your free balance falls below your locked margin requirement:

balance_quote < locked_margin

This can happen when spot prices move adversely against your short positions between trades or margin refreshes. As the underlying price moves, the N-point Black–Scholes stress model may produce a higher margin requirement than the one stored in your account. If a new stress snapshot is published and your margin is not refreshed in time, the gap between stored and actual requirement can also cause an account to become undercollateralized.

Who can liquidate?

Liquidation is permissioned. Only addresses whitelisted in the liquidators role can execute a liquidation transaction. This prevents griefing: a random bot cannot liquidate a healthy account, and liquidators are reputable, vetted services.

On testnet Phasis runs a dedicated liquidation keeper. On mainnet this role is expected to be filled by professional market-making and risk services.

How a liquidation works

When your account is undercollateralized:

1. The keeper calls isLiquidatable(account) off-chain to confirm the account is underwater.
2. The keeper may call refreshAssetMargin first to ensure the stored margin reflects the latest stress snapshot.
3. The keeper submits a liquidation transaction specifying which series and how many contracts to close.
4. On-chain, the protocol verifies:
   • balance_quote < locked_margin (must be underwater)
   • The sender is a whitelisted liquidator
   • The target account holds a non-zero position in that series
5. The protocol closes up to the specified quantity via the embedded order book (using an IOC order against resting bids or asks).
6. The liquidator receives an incentive fee of 50 basis points (0.50%) of the notional closed, paid from your balance.
7. Your position is fully closed in that series; margin lock is updated.

After liquidation you can continue trading in other series or withdraw your remaining balance.

What you see as a trader

You will not receive an on-chain warning before liquidation occurs. If your account is liquidated you will notice:

• A position that was open is now zero.
• Your balance_quote is reduced by the intrinsic value of the position that was closed, plus the 0.50% liquidation fee.
• Your locked_margin decreases accordingly.

How to avoid liquidation

Monitor your free balance. The most reliable protection is keeping free balance well above your locked margin. A buffer of at least 20–30% above the current margin requirement gives headroom for spot price moves to increase your requirement without immediately triggering liquidation.

Close or hedge short positions before large moves. If you anticipate volatility (e.g., around major economic events), reducing or hedging naked shorts reduces your margin requirement.

Deposit USDC proactively. You can deposit additional USDC at any time to increase your free balance. Deposits take effect in the same transaction.

Monitor stress snapshots. The stress snapshot is republished roughly every 30 seconds. After a large spot price move, your margin requirement may jump even without a trade. Refresh your margin display and compare it to your free balance.

Use debit spreads. Long-and-short combinations that cap maximum loss (such as bull call spreads) carry zero margin lock, eliminating liquidation risk on those positions entirely.

Continue to FAQ.