Liquidations

Overview

Liquidations occur if your portfolio value drops below the maintenance margin threshold.

If your portfolio value drops below the maintenance margin requirement:

• Vest’s liquidator identifies the smallest portion of your position needed to reduce systemic risk.

• The liquidation is executed at the best possible price, minimizing costs for you and minimizes systemic risk across all markets.

• The process restores your portfolio to a healthy margin level without over-liquidation while preventing shocks to the market.

Partial liquidations

Vest offers partial liquidations, minimizing unnecessary loss for traders. Instead of liquidating your entire position when margin requirements aren’t met, Vest only liquidates enough to bring your account back to a healthy level. Because risk is fully priced in, this means that there are zero liquidation penalties.

Determining liquidation price

A trader's portfolio enters liquidation when:

Portfolio Value < Maintenance Margin Requirement

Note that system then closes positions until:

Account Value ≥ Initial Margin Requirement

The system determines which positions to liquidate by solving the following optimization problem:

$$\underset{w}{\text{minimize}} \quad \sum_{i=1}^n w_i q_j^{(i)} S_t^{(i)} \\ \text{subject to} \quad \mathbf{0} \preceq \mathbf{w} \preceq \mathbf{1} \\ (r + \epsilon)\sum_{i=1}^n (1-w_i)\left|q_j^{(i)}\right|S_t^{(i)} \leq c - \pi + \sum_{i=1}^n (S_t^{(i)} - s_{\text{entry}}^{(i)})q_j^{(i)}$$

Where:

• $w_i \in [0,1]$: Liquidation weight for position $i$
• $q_j^{(i)}$: Size of position $i$ in asset $j$ (signed)
• $S_t^{(i)}$: Current price of asset $i$
• $s_{\text{entry}}^{(i)}$: Entry price of position $i$
• $c$: Remaining collateral
• $\pi$: Liquidation fee
• $r$: Maintenance margin rate
• $\epsilon$: Safety buffer

Liquidation fees on such positions must ensure risk neutrality. In other words they must satisfy

$\pi = \left(\rho(X_{t+\tau}(\theta')) - \rho(X_{t+\tau}(\theta))\right)_+$

such that

• $\theta = (q, C, P, L)$
• $\theta ' = (q - (1-w)q_j, C - (1-w)q_j^T S_t, P, L)$

This ensures that Vest

1. Minimizes Trader Impact: Liquidates only what's necessary

2. Prevents Cascades: Considers portfolio cross-effects

3. Risk-Neutral: Fees cover marginal risk increase

4. Convex Guarantee: Ensures unique optimal solution

Technical details on liquidations can be found in the whitepaper.