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What Are Liquidations?
When you open a leveraged position, borrowing up to 6x the funds you add, the protocol needs to make sure you'll be able to pay back that loan. So the amount you add from your funds acts as collateral, which grows as you accumulate yields (minus borrowing interest).
That collateral has to remain above the amount you owe (plus a margin of safety to account for potentially quick price movements or high gas) or the protocol may close your position to pay back lenders, which is called Liquidation. You want to avoid liquidation because at that time, depending on the collateral asset supplied your remaining position value would be paid to the liquidator bot as a reward for closing your position and ensuring lenders were paid back.
Liquidation risks can be mitigated by using low/no leverage, or by using delta neutral and yield arbitrage strategies that attempt to maintain fully neutral price exposure.
Easily track your liquidation risk for an open position using the Position Health bar on the interface.
Last modified 4mo ago