> For the complete documentation index, see [llms.txt](https://elysia.gitbook.io/elysia-perps/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://elysia.gitbook.io/elysia-perps/risk-and-security/liquidation-risk.md).

# Liquidation Risk

Liquidation is the single largest risk in leveraged trading. The [Liquidation](/elysia-perps/mechanics/liquidation.md) page in Mechanics covers *when* and *how* a position is closed. This page covers what happens **behind** that close: the insurance fund, auto-deleveraging, and what they mean for you whether you are the trader being liquidated or a trader on the other side.

## Recap: when you get liquidated

A position is liquidated the moment its **equity** falls to or below its **maintenance margin** (a per-market setting, 2.5% of position value on BTC-PERP-EL and 3.0% on US500-PERP-EL), measured against the [mark price](/elysia-perps/mechanics/mark-and-oracle.md). It closes at the **bankruptcy price** and pays a **liquidation fee** (a platform-wide 0.5% on Elysia Perps). See [Liquidation](/elysia-perps/mechanics/liquidation.md) and [Margin & Leverage](/elysia-perps/trading/margin-and-leverage.md).

The rest of this page is about how that close is actually carried out, and the risk it can pass on to other traders.

## The three-stage cascade

![Three-stage liquidation cascade: order book first, then insurance fund, then auto-deleveraging as a last resort](https://1949530945-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FDKUIMv3mUd02iALaez0P%2Fuploads%2Fgit-blob-ae529c7cce2205d0ff7e9d50f9134082b997f3c1%2Fliquidation-cascade.png?alt=media)

When a position must be liquidated, the system tries three routes in order and stops as soon as one absorbs the position:

1. **Order book**: the position is offered to the open market at the bankruptcy price. If there is a resting order good enough to fill it, the position closes here and no one else is affected.
2. **Insurance fund**: if the order book cannot fill it (no order at or better than the bankruptcy price), the **insurance fund** takes the position over at the bankruptcy price.
3. **Auto-deleveraging (ADL)**: if the insurance fund cannot cover it either, the position is matched directly against traders holding the **opposite** side.

Most liquidations end at stage 1 and never touch anyone else. Stages 2 and 3 exist for the fast, thin-liquidity moments where the market alone cannot absorb a failing position.

## The insurance fund

The insurance fund is a dedicated account that acts as the protocol's shock absorber.

* **What it does**: when a liquidation cannot fill on the order book, the fund steps in and takes the position onto its own book at the bankruptcy price, so the market stays orderly.
* **How it is funded**: primarily by the **0.5% liquidation fee** collected on every liquidation. Every liquidation that clears cleanly adds to the buffer that protects everyone else.
* **Why it matters to you**: a healthy insurance fund is what stands between a cascade of liquidations and *you* being auto-deleveraged. The larger the fund relative to open interest, the less often stage 3 is ever reached.

## Auto-deleveraging (ADL)

ADL is the last resort, and the only stage that can reach into a **profitable, healthy** position that did nothing wrong. It is worth understanding before you run a large winning position.

**What happens.** If the insurance fund cannot absorb a liquidation, the system closes part or all of a trader on the opposite side to take over the failing position. That trade settles at the **bankruptcy price**.

**Who gets picked first.** ADL selects counterparties by a priority score:

```
score = (profit as % of margin) × leverage
```

The **most profitable, highest-leverage** positions on the opposite side are deleveraged first. Running maximum leverage on a large unrealized profit is exactly the profile ADL reaches for first.

**Why a winning position can be settled below its mark value.** ADL fills at the **bankruptcy price**, not the mark price. If your entry price sits between the two, the forced close can turn part of an unrealized profit into a smaller profit or, in the extreme, a loss on the deleveraged portion. This is standard behavior across major perp venues (Binance and Bybit deleverage the same way); it is an inherent property of ADL, not a fee or a penalty.

**What you see.** If you are deleveraged, the position is reduced or closed automatically and you are notified, with the size and price of the ADL fill. No liquidation fee is charged to an ADL counterparty. The fee only applies to the position actually being liquidated.

## Shortfall

If all three stages run and part of a position still cannot be closed (which requires there to be essentially no profitable opposite side left), the remainder is recorded as a **shortfall** and resolved through manual intervention. This is a rare, tail-risk state, not part of normal trading.

## How to keep your liquidation risk low

* **Use less leverage than the maximum.** The gap between your equity and the maintenance margin is your buffer; leverage thins it.
* **Watch your liquidation price**, not just your entry. It moves as funding and price move.
* **Remember margin is isolated.** A position is defended only by the margin assigned to it. Spare `available` balance is not automatically pulled in, so the margin you commit at open is the buffer.
* **Be aware that large, highly-leveraged winners are first in line for ADL.** Taking partial profit reduces both your market risk and your ADL exposure.

## Where to go next

* The mechanics of the close itself: [Liquidation](/elysia-perps/mechanics/liquidation.md).
* Keeping a safe buffer: [Margin & Leverage](/elysia-perps/trading/margin-and-leverage.md).
* The price liquidation is measured against: [Mark & Oracle Price](/elysia-perps/mechanics/mark-and-oracle.md).