Liquidation & No ADLs

General

The portfolio becomes eligible for liquidation when the available margin in an account reaches 0.

After liquidation, the account is reset to hold only a USDT balance and no open positions.

Liquidation Process

• Any participant may act as a liquidator.

• The liquidation function is public, but the process is pre-determined by smart contracts.

  • Liquidators cannot arbitrarily decide liquidation steps.

• Orders are placed on the order book as market orders for the full size of each position, at prices required to fully execute given current depth.

• In volatile markets, liquidations may result in additional losses for the account holder due to thin market depth.

• All liquidations are full liquidations. A full liquidation means that all positions are unwound and all balances are sold for USDT. All orders during liquidation are taker orders.

Liquidator Fees & Rewards

• Liquidators receive a reward of up to 1% of the post-liquidation portfolio value.

• Rewards are held in escrow for 24 hours.

• The exchange administrator may revert rewards to the original owner if malfeasance (e.g., manipulation) is detected.

• At launch, WCM operates the liquidator. After launch, the liquidation function will be publicized, enabling anyone to liquidate.

Loans

• A user who borrows, and does not pay their interest on time, will trigger an automatic borrow and interest payment forced by the liquidation engine. The other positions in the portfolio will not be unwound, unless the interest payment on the new loan brings the available margin to 0.

How does WCM manage a lender getting liquidated?

• Let's say an account has lent 100 ETH and this account gets liquidated (due to some other position). Under normal conditions, the liquidation engine will source another lender (or lenders) from the order book, matching the newly sourced lender with the original lender's borrowing counterparty. The original lender in liquidation pays the difference in interest rates.

Bankruptcy Liquidations

• During extreme market moves, a portfolio may become net negative (bankrupt).

• The liquidation process treats lenders as priority creditors. Then it pays perpetual future counterparties. Finally, any remaining spot balance is returned to the account as USDT.

• At this stage:

  • No liquidator bounty is paid (funds go to counterparties).

  • The exchange operator executes a special liquidation with bankruptcy commands:

    • Close loan with partial payment

    • Close perp position with partial payment

  • Counterparties take a loss.

  • The operator charges no fees for this process.

ℹ️ The operator is incentivized to set risk parameters such that bankruptcies are extremely rare.

Liquidation Safeguards

To prevent abuse, liquidators face strict rules:

• ❌ No limit orders allowed

  • Only fill or revert and fill partial, kill rest order types are permitted

• ❌ No lending orders during liquidation

• ✅ May borrow up to the amount lent

• ✅ Borrow interest rate capped at 50%

  • Ensures lenders cannot lose more than 2% of their lent funds

• ✅ Order prices restricted to ±4 × riskSlippage from the mark price

• ✅ Spot buys limited to borrowed amount + 4% (to cover fees/interest)

• ✅ Spot sells allowed only after all borrows are repaid

• ✅ Perp trades may only reduce existing positions