Liquidation Engine
Liquidation Overview
In the dynamic world of decentralized finance (DeFi), the D4X liquidation engine stands as a critical component ensuring the stability and reliability of the trading protocol. This engine is the safety net that protects the system against market volatility and ensures the integrity of trades on the platform. Here's an in-depth look at how the D4X Liquidation Engine operates, its underlying principles, automation processes, and the technology it relies on.
Liquidation in the D4X context refers to the process initiated when the exchange rate of cryptocurrencies relative to a trader's open position hits a critical level. This liquidation level is regularly calculated by the D4X smart contract. When the market rate reaches this liquidation value, the platform commences the liquidation of the trader’s open position.
The liquidation process is triggered when a trader's position falls below a specified maintenance margin requirement. This is a protective measure that prevents the protocol from incurring losses due to a trader's inability to maintain their margin positions during market downturns.
The Liquidation Process
When a position meets the liquidation criteria, the Engine automatically calculates the amount to be liquidated and executes the transaction using smart contracts. The assets are then sold on decentralized exchanges (DEXes) such as Uniswap or Curve, with the proceeds used to repay the debt.
DEX's Data feed
The Engine heavily relies on real-time market data provided by DEX's in real-time. These DEX's feed accurate and tamper-proof market rates into the system, enabling the Liquidation Engine to calculate collateral ratios and identify positions that are ripe for liquidation.
How Liquidation is executed
The process of liquidation on D4X could be managed by:
Liquidation Engine (LE)
Manual Liquidator
Case of the Liquidation Engine (LE)
Liquidation Engine (LE) automatically initiates the liquidation of a trader’s position when the exchange rate moves unfavorably and reaches a critical threshold.
The D4X Liquidation Engine is designed to mitigate the protocol's exposure to bad debt by automatically executing liquidations of undercollateralized positions. This process is critical in margin trading and lending platforms where the value of collateral can fluctuate rapidly with the volatile cryptocurrency market prices
Smart contract of the D4X platform regularly calculates the critical (liquidation) level of the exchange rate of cryptocurrencies in relation to the trader’s open position. When the corresponding rate reaches the liquidation value, the D4X platform initiates the process of liquidation of the trader’s open position. When the corresponding exchange rate reaches the liquidation value, the D4X platform’s Liquidation Engine (LE) initiates the process of liquidation of the trader’s open position.
The special task "Liquidation" deployed in the decentralized automation service checks every period (each block or each small period depends on the kind of automation service) if some positions have to be liquidated. This task runs liquidation functions for all positions that have to be liquidated according to the queue.
Automated Liquidation Engine
Automation is central to the D4X Liquidation Engine, achieved through integration with decentralized networks like Gelato and Keeper Network. These services monitor positions around the clock, executing liquidations without the need for manual intervention and ensuring that the system can respond swiftly to changing market conditions.
Case of a Manual Liquidator (ML)
Everybody from the D4X community could initiate liquidation by running if LE doesn't work. This gives D4X an additional layer of risk stability and decentralization.
In this case, the position will be checked on readiness for liquidation by the smart contract.
Manual Liquidator will receive a liquidation fee.
Advantages of Decentralized Execution
The decentralized nature of the D4X Liquidation Engine eliminates the need for centralized control and reduces the risk of manipulation. By leveraging smart contracts and decentralized execution, the platform provides a transparent and trustless environment for traders.
Insurance Fund Coverage
An innovative feature of D4X is its Insurance Fund (iFund), designed to cover the protocol's losses in the event of liquidation slippage or if the liquidated collateral does not cover the full debt. This fund accumulates capital from a variety of sources, including transaction fees and a portion of liquidation penalties.
Ensuring Continuity and Stability
By automating the liquidation process and relying on decentralized data sources and execution, the D4X Liquidation Engine plays a pivotal role in maintaining the protocol's health and users' confidence. It embodies the principles of DeFi by offering a system that's not only efficient and responsive but also aligned with the ethos of decentralization.
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