What Is Liquidation?

Liquidation — commonly called "getting rekt" or "blown up" — is the process by which a trading platform or on-chain mechanism automatically closes a trader's position when the account margin is no longer sufficient to sustain it.

Why It Matters

In leveraged derivatives markets such as perpetual contracts (Perps), liquidation is the core mechanism that protects the systemic integrity of the market. It determines exactly how far the market can move against you before your entire margin is wiped out. For anyone participating in leveraged trading, understanding liquidation is the first step in risk management — and the foundational knowledge that prevents a single trade from zeroing your account.

Core Mechanics and Key Concepts

Initial Margin and Maintenance Margin

• Initial Margin: The minimum capital required to open a position. It determines the maximum position size you can control.
• Maintenance Margin: The minimum margin ratio the account must maintain while a position is open. When account equity falls below this threshold, the liquidation process is triggered.

Liquidation Price

The liquidation price is the price of the underlying asset at which a position is forcibly closed. For a long position:

Liquidation Price ≈ Entry Price × (1 − 1/Leverage + Maintenance Margin Rate)

The higher the leverage, the closer the liquidation price is to the entry price, and the less room the position has to absorb adverse price movement.

Partial vs. Full Liquidation

Different platforms implement this differently. Partial liquidation gradually reduces a position to lower risk exposure; full liquidation closes the entire position immediately. Decentralized perpetual platforms such as Hyperliquid publish detailed liquidation rule documentation — it is worth reading before you trade.

Insurance Fund

When extreme market volatility causes a liquidation to fill at a price worse than the liquidation trigger price (a "price gap"), the insurance fund covers the shortfall, protecting profitable counterparties from losses. If the insurance fund is depleted, some platforms activate Auto-Deleveraging (ADL), which forcibly reduces the positions of profitable traders.

User Scenarios

Scenario A: Long BTC at 10x Leverage BTC is priced at 60,000 USDT. You open a 10x long with 1,000 USDT margin, giving a notional value of 10,000 USDT. With a maintenance margin rate of 0.5%, the liquidation price is approximately 54,550 USDT. A ~9% decline in BTC triggers liquidation and the full 1,000 USDT margin is lost.

Scenario B: Adding Margin When the price approaches the liquidation level, you can deposit additional margin to reduce liquidation risk. Keep in mind that doing so means committing more capital to a position that is already moving against you — weigh this carefully.

Scenario C: Setting a Stop-Loss Placing a stop-loss order before the liquidation price is a far more disciplined risk-management approach than waiting to be liquidated.

OneKey App Access

OneKey provides a Perps market interface and trading entry point, enabling users to participate in on-chain perpetual contract markets.

1. Download the OneKey App
2. Go to the Perps section
3. Select a trading pair (e.g., BTC-PERP) to view the current price, funding rate, and estimated liquidation price
4. Before placing an order, the App displays an estimated liquidation price to help you visualize your risk exposure

The OneKey App does not constitute investment advice. All trading decisions are made solely by the user.

Risks and Considerations

• Liquidation is not a platform malfunction: It is a normal risk-control mechanism, not evidence of market manipulation.
• Slippage risk: In extreme market conditions, the actual fill price may be worse than the liquidation trigger price, potentially leaving an account balance below zero (some platforms pursue negative balances).
• Funding rate erosion: High-leverage positions are subject to funding rate settlement every 8 hours. Persistent funding costs silently erode margin and can accelerate liquidation.
• Avoid habitual margin top-ups: Repeatedly adding margin to a losing position can mask flawed trade reasoning and compound losses.

For foundational knowledge on Ethereum wallets and DeFi security, refer to the Ethereum official documentation.

FAQ

Q1: Does liquidation zero out my margin entirely? A: Generally, yes. Most platforms return any remaining margin (after deducting liquidation fees) to the user. In severe gap scenarios, the returned amount may be zero or, in some cases, a negative balance may be generated.

Q2: How do I know how close I am to liquidation? A: In the OneKey App Perps interface, the position detail view displays your current liquidation price and account margin ratio in real time.

Q3: Is there a warning before liquidation occurs? A: Some platforms send a notification when the account margin ratio approaches the maintenance margin level. However, on-chain contract liquidation is triggered automatically by smart contracts and does not depend on manual platform intervention. Enable App push notifications and actively monitor your positions.

Q4: Can short positions be liquidated too? A: Yes. Short positions face the same liquidation risk when the price rises sharply. The logic is symmetrical with long positions.

Q5: What is the fundamental difference between liquidation and a stop-loss? A: A stop-loss is a risk-control order actively set by the user, executed by the platform according to order logic. Liquidation is a forced trigger from the margin mechanism, typically occurring when no stop-loss is set or when a stop-loss fails to fill. The two are not interchangeable.

Take Action

Understanding liquidation is a prerequisite for participating in leveraged trading. Visit the OneKey website or download the OneKey App, and use the Perps section to simulate the liquidation price at different leverage levels. Build the habit of quantifying your risk before entering any position.