Liquidations

The liquidation condition of the smart contract at which a liquidation event can be triggered takes into account accrued fees, collateral and PnL. It is as follows:

$$accruedFees > liqThreshold \times collateral + PnL$$

The price at which liquidation occurs is a function of position size, average entry price, collateral, accrued fees (which include closing/funding/borrowing), and a liquidation threshold which is defaulted to be 0.99 - this threshold is put in place to act as a built-in safety net to protect the protocol from losses on a position exceeding collateral.

$$deltaLiqPercent = \frac{(liqThreshold \times collateral) - accruedFees}{posSize}$$

$$liqPrice = \begin{cases} entryPrice \times (1 - deltaLiqPercent) & \text{if LONG} \\ entryPrice \times (1 + deltaLiqPercent) & \text{if SHORT} \end{cases}$$

If liquidated the trader will lose all of the collateral in their position.

For example, assume a 231,640,466 long position on BONK/TUSD with 1,000 TUSD collateral and an entry price of $0.000021585175. Assume the trader has held this position for a few days and has accrued total fees of $30.00. The corresponding deltaLiqPercent is 0.0004144% and the liquidation price would be $0.000021585086.

Open Interest Limits

As a risk management tool, there are Open Interest (OI) limits for each asset and direction. OI limits for both Longs and Shorts are established to protect the protocol from total OI exceeding TVL (in this case TLP backed liquidity). These limits, for each tradable asset, will be dynamically adjusted as follows: To ensure that traders can efficiently maximize on our available TVL, TsunamiX V2 has created an OI rebalancing solution, which adjusts the OI limit of each asset based on utility. Our new model compares previous and current asset trading demand in order to offer traders a broader opportunity to access OI on their favorite pairs. The components of this model come together to build the most innovative and strategic OI offerings in the perpetuals space.

Profit Limits

In order to further protect the vault, we have put limits (maxProfitPercent) into place per asset for how much any one trade can profit. The default is set to 1% of TVL, however this will likely be reduced over time as the TVL grows. In the event that one's profit exceeds 1% of TVL, then the position will be forced closed.