Liquidations and ADL

A leveraged position is supported by collateral rather than its full market value. If losses reduce the account’s equity below maintenance margin, the position becomes eligible for liquidation.

Liquidation closes or transfers the unsupported exposure before its loss can grow without a source of payment. Anyone may submit the trigger, while Novrinex determines whether the account is eligible and calculates the result.

When a position becomes liquidatable

Account health is calculated from collateral, open positions, unrealized profit or loss at the mark price, and the maintenance requirement of the relevant risk domain.

An estimated liquidation price shows where the position may reach its threshold if other inputs stay unchanged. Funding, collateral transfers, other cross-margin positions, and changes in maintenance requirements can move the actual point.

First, cancel open risk

Liquidation begins by cancelling the distressed subaccount’s resting orders. This prevents those orders from adding exposure and releases their reserved collateral.

Novrinex then creates a bounded reduce-only order to close the liquidatable position against ordinary order-book liquidity. If enough liquidity is available, the market absorbs the position through normal counterparties.

Collateral left after the account returns to a healthy state remains with the trader.

Backstop capacity

If the book cannot close the permitted quantity, the risk domain’s backstop can accept remaining exposure. The transfer uses the same position and ledger accounting as a normal fill.

Backstop capacity is limited for each cycle. A liquidation cannot impose unlimited work or exposure on one block.

Insurance

Closing a position beyond its bankruptcy point can produce a deficit when the account’s remaining collateral cannot cover the amount owed.

The market draws from the insurance account assigned to its risk domain. Insurance covers only the balance available, and the ledger records the covered and uncovered amounts separately.

Automatic deleveraging

Automatic deleveraging, or ADL, is the final loss mechanism when a deficit remains after book execution, backstop capacity, and insurance.

ADL reduces profitable positions on the opposite side of the market. A bankrupt long is paired with profitable shorts; a bankrupt short is paired with profitable longs. Each forced fill reduces both sides by the same quantity, preserving the market’s zero net position.

Eligible accounts are ranked by exact profit relative to position notional, with a deterministic account ID used to break ties. The loss assigned to an account cannot exceed the profit available under the protocol calculation.

Bounded and isolated execution

Each cycle limits the book quantity, backstop allocation, and number of ADL accounts it may touch. If the proposed plan cannot settle completely within those rules, none of its candidate changes are committed.

Backstop and insurance resources belong to one risk domain. A deficit does not draw from another domain or unrelated group of traders.