Liquidation System

The DEX implements a socialized liquidation system through the main Neony vault to ensure market stability and fair distribution of liquidation proceeds.

How Liquidations Work

Liquidation Process

1. Pre-Liquidation Checks:

   • System checks the margin account status
   • All pending orders are automatically cancelled
   • Position's current state is evaluated

2. Trigger Conditions:

   • Position's collateral ratio falls below maintenance threshold
   • Price moves unfavorably beyond safety margin
   • Account health factor drops below 1.0

3. Liquidation Execution:

   • Main Neony vault automatically liquidates the position
   • Collateral is seized and sold at market price
   • Debt is repaid from the proceeds
   • Remaining value is distributed to the vault

Socialization Through Neony Vault

• Centralized Liquidation:

  • All liquidations are handled by the main Neony vault
  • Ensures consistent and fair execution
  • Prevents market manipulation

• Risk Distribution:

  • Liquidation risks are shared across all vault participants
  • Reduces individual exposure to bad debt
  • Provides stability during market stress

Liquidation Parameters

Parameter	Description	Example
Maintenance Margin	Minimum collateral required to keep position open	110%
Liquidation Threshold	Collateral ratio that triggers liquidation	105%

Note: There is no separate liquidation penalty. The maintenance margin itself serves as both the penalty and buffer for liquidation. There is also no maximum liquidation size: when a position breaches the maintenance margin, the entire position is seized and liquidated by the Neony vault.

Example Scenario

1. Initial Position:

   • Collateral: 1 BTC ($30,000)
   • Borrowed: $25,000 USDC
   • Collateral Ratio: 120%

2. Price Drop:

   • BTC price falls to $27,000
   • New Collateral Value: $27,000
   • New Collateral Ratio: 108%

3. Liquidation:

   • Position is liquidated by Neony vault
   • Collateral is sold at market price
   • Debt is repaid
   • Remaining value goes to vault

Benefits of Socialized Liquidations

• Market Stability:

  • Prevents cascading liquidations
  • Reduces market impact
  • Maintains price stability

• Fair Distribution:

  • All vault participants share in profits/losses
  • No preferential treatment
  • Transparent execution

• Risk Management:

  • Centralized risk monitoring
  • Professional market making
  • Efficient capital utilization

Summary

• Liquidations are handled by the main Neony vault
• Risks and rewards are socialized across vault participants
• System ensures fair and efficient liquidation execution
• Helps maintain market stability during stress periods