dFuture Liquidation engine

On normal futures exchanges, if a trader holds a leveraged futures position, and due to changes in market prices that causes the account to go beyond bankruptcy, meaning the trader’s account has a negative net asset value, the trader should pay the loss. But for decentralized futures exchanges, if a trader holds a leveraged position and his account goes beyond bankruptcy, the platform can only liquidate his assets in the exchange, and minimizes the loss through the design of a liquidation mechanism.

Compared with other futures trading platforms, dFuture has two different characteristics. One is that an external feed price forms the trading price; the other is that you can only make ‘taker’ orders; and therefore, the liquidation mechanism will be different. Since the prices on the dFuture platform are formed by external price quotations and not based on order book matching, the dFuture platform will not crash the market during the liquidation process, and every liquidation will be executed at the current platform price.

Next, we will analyze in detail the “stampede effect” in futures trading. For a futures exchange using the order book model, the underlying price is determined by the transaction between two parties. Due to the existence of leverage, if the price moves in the long or short direction and reaches the liquidation line, the exchange will take over the position and sell the liquidated assets to the market, causing the price to move even further in that direction, and this further movement of the price can lead to more liquidations with even greater slippage. This can cause the whole process to enter a vicious circle, similar to a death spiral. Therefore, for traditional futures exchanges, when designing a liquidation mechanism, a variety of complex mechanism designs are used to minimize the occurrence of this situation.

But for dFuture, since the price is a synthetic price generated by external price feeds, the liquidation of the dFuture platform will not cause further price movement and not cause a stampede effect. Therefore, dFuture’s liquidation mechanism is better, simpler, and fairer than that of traditional futures exchanges.

The liquidation mechanism of dFuture is the same as most liquidation mechanisms, starting by detecting when a trader’s trading margin is approaching the maintenance margin, the current maintenance margin of dFuture is 2%. When the trader’s margin is less than 2%, the platform will directly execute the liquidation operation.

When entering the liquidation phase, the automatic entry mechanism for arbitrageurs will be activated. In this case, arbitrageurs who choose to join the system will pay a certain price to take over the liquidation account to be liquidated. They can operate on the position of the account before the account is completely bankrupt so that they can successfully manage these positions, such as establishing hedging positions on centralized exchanges to gain income. For dFuture, this mechanism protects the interests of LPs on one hand, and maintains the scale of the platform’s naked positions on the other. It will not cause the naked positions to suddenly increase in the direction of liquidation due to forced liquidation, therefore reducing LP’s risk exposure.

Under normal circumstances, the above measures can complete the liquidation process after a liquidation event, but in case of a big market fluctuation such as a rapid rise or fall in prices, the trader’s account will go beyond bankruptcy even after a forced liquidation, dFuture has the same solution as other exchanges, using risk protection funds and ADL (Auto Deleveraging) engine as the final solution.

· ADL: If the forced liquidation position cannot be liquidated in the market, and when the marked price reaches the bankruptcy price, ADL engine will deleverage the position of investors who hold positions in the opposite direction. The priority of positions to be deleveraged will be determined based on leverage and profit ratio.

· Risk protection fund: dFuture’s risk protection fund comes from two funding sources: the remaining margin from trader’s account after a forced liquidation, and the 0.05% handling fee when a position is closed.

When an account goes beyond bankruptcy, the system will use the risk protection fund to make up for the loss. If the risk protection fund dries up, the ADL engine will be activated to auto deleverage the counterparty’s positions in sequence based on leverage and profit ratio. At the same time, if the profit from a trader’s deleveraged account cannot be paid out, a clawback will occur, which we handle the same way as all other exchanges.

In principle, we do not want a clawback situation. Through the design of the automatic arbitrageur entry mechanism, risk protection fund mechanism and dynamic trading fees, we hope to avoid the occurrence of a clawback as much as possible. We hope that dFuture can support large scale futures transactions under the premise of complete decentralization and avoid any clawbacks. During the dFuture internal beta and public beta, there was no clawback in the system after 15% price fluctuations of btc and 25% price fluctuations of eth. However, the risk of futures trading always exists. If a clawback ever occurs in our system of operations, we will issue a system announcement to analyze the cause of the clawback in detail. If the clawback is caused by the dFuture system, we will fix the problem and compensate for this part of the loss through the future income of the risk protection fund.


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