Due to the high volatility of the digital currency market, leveraged transactions are more likely to trigger liquidation. So, the most concerned about leveraged traders is often: when forced liquidation leads to short positions, who will bear the loss?
What is wear loss
Suppose a large trader uses a leverage of 100 times to hold a huge long position. One day, due to a sharp drop in the market price, the trader's position is forced to liquidate, resulting in a huge loss of liquidation. Loss of position wear refers to the position loss is greater than the used position margin after the liquidation is executed. In order to make up for the loss of long-term position, most trading platforms use a socialized loss-sharing mechanism, which allocates the total contract loss to all profitable traders in proportion.
Disadvantages of socialized loss sharing mechanism
The socialized loss-sharing mechanism refers to the behavior of distributing the total contract loss to all profitable traders in proportion to compensate for the loss of short-term positions. In this mode, a single high-risk trader will cause huge losses to all profitable traders (including low-risk traders). Obviously, this is unfair to all market participants; why do other traders need to bear the huge losses caused by high-risk traders? If there is a large-scale liquidation event, it means that many traders will be affected.
What is automatic deduction
Auto Deleveraging, which refers to when a trader has a forced liquidation, if the position cannot be liquidated at a price better than the liquidation price, and the balance of the insurance fund is not enough to cover the loss of the liquidation , The automatic lightening system will lighten the positions of traders who hold positions in the opposite direction to ensure that all mandatory liquidation orders can be filled in time, so that the risk can be cleared as soon as possible and avoid further expansion of losses.
Workflow of the automatic lightening mechanism
a) The trader with the highest ranking in the automatic lightening system will be selected by the system first; traders can check the priority level of automatic lightening through the ADL indicator;
b) The ranking of automatic lightening depends on the profit and loss of the position and the effective leverage used, that is, the more profit and the greater the leverage used, the higher the ranking;
c) The selected position will be reduced at the bankruptcy price of the liquidation order;
d) The reward of the liquidity provider will be given back to the selected trader, and the liquidity extractor's fee will be charged from the trader's account that triggered the liquidation;
e) Traders who have experienced automatic lightening will receive an email/phone notification, and all activity orders will be cancelled, and traders can freely re-enter the market to trade.
Advantages of automatic lightening system
Different from other trading platforms, Dcoin uses the ADL system, which automatically selects traders who hold orders in the opposite direction to lighten their positions according to the percentage of profit and loss of the position and the effective leverage used. This means that the smaller the profit percentage of the position held by the trader, the smaller the leverage used, and the smaller the probability of being automatically reduced.
The comparison of automatic lightening mechanism and socialized loss sharing mechanism
a) Different from the social loss sharing mechanism, it calculates the total contract loss and distributes it to all profitable traders in proportion. In the automatic lightening system, the positions are ranked according to the profit of the position and the effective leverage used, and the positions are automatically lightened according to the order of ranking. Therefore, low-risk traders are less likely to be automatically lightened, which is fair to low-risk traders.
b) The socialized loss sharing mechanism needs to lock the realized profits until the contract settlement date. This mechanism lacks flexibility and causes inconvenience to traders. After the automatic lightening event occurs, traders can immediately make trading decisions without waiting until the settlement date.
c) Traders can see their ranking status through the ADL queue indicator, and change the priority by adjusting the position in time, so as to avoid being automatically lightened up, and solve the uncertainty of the social loss sharing mechanism.
How to reduce the risk of being automatically liquidated
Traders can check their position in the ADL queue indicator at any time, and reduce the risk of being automatically reduced by reducing leverage or closing some profitable positions.
a) Reduce the leverage level of the position and reduce the ranking of automatic lightening in time;
b) Closing some profitable positions will not reduce the ranking of automatic lightening, but it can reduce the number of contracts exposed to the risk of automatic lightening.
Automatic lightening queue
At any time, the position of the trader in the ADL queue is displayed by an ADL indicator. Each indicator light represents a 20% priority increment; all lights are on, which means that the trader is in the highest percentile of the automatic lightening queue. When it is impossible to force liquidation in the market, it may be Be deleveraging.
The calculation of the sorting factor of the automatic lightening queue
The sequence of automatic lightening is determined by the sorting factor of the automatic lightening queue.
The calculation method of the ranking factor is as follows:
Sorting factor = percentage of profit * effective leverage (if the contract is profitable) = percentage of profit / effective leverage (if the contract loses)
Where profit percentage = (marked value-average open value) / abs (average open value)
Effective leverage = ABS (marked value) / (marked value-bankruptcy value)
Marked value = position value at the marked price
Average open value = position value at the average open price
Note: The automatic lightening system sorts the long and short sides from high to low.