Liquidations and Auto-Deleveraging

How liquidations and auto-deleveraging work.

As a HIP-3 Market, we inherit our liquidation and auto-deleveraging mechanisms from Hypercore. We've summarized key considerations below, including how our oracle and mark price mechanics differ from Hyperliquid. But you should review Hyperliquid's documentation in detail to better understand how liquidations and auto-deleveraging works on all Hyperliquid markets.

IMPORTANT NOTE: XYZ assets are not backstopped by the Liquidator Vault. In the event of an account's equity dropping below the maintenance margin, auto-deleveraging is expected. We also use a different mark price than Hyperliquid.

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How Liquidations Work on Hyperliquid

A liquidation event occurs when a trader's positions move against them to the point where the account equity falls below the maintenance margin. You can read more about maintenance margin mechanics under the Margin and Leverage section.

When account equity drops below the maintenance margin, the positions are first attempted to be entirely closed by sending market orders to the book. These orders are the full size of the position, although they may only be partially closed depending on market liquidity. After a position is partially or fully closed, the trader retains any remaining collateral if maintenance margin requirements have been met.

If the account equity drops below 2/3 of the maintenance margin without successful liquidation through market orders on the book, a backstop liquidation happens through the Hyperliquid liquidator vault (only applicable for Hyperliquid-native perps). During backstop liquidation, the maintenance margin is not returned to the user. You can read more about the Liquidator Vault in Hyperliquid's documentation.

In Hyperliquid's system, when a cross position is backstop liquidated, the trader's cross positions and cross margin are all transferred to the liquidator. Cross margin and other positions are not impacted by isolated positions that are backstop liquidated.

Liquidations use the mark price. Hyperliquid-native perps specifically use Hyperliquid's mark price, while XYZ assets use the XYZ Relayer Mark price, further detailed in the Relayer section.

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Computing Liquidation Price

When entering a trade, an estimated liquidation price is shown. This estimation may be inaccurate compared to the position's estimated liquidation price due to changing liquidity on the book. Even after a position is opened, a liquidation price may be shown which is not the actual liquidation price due to funding payments or changes in unrealized PnL in other positions (for cross margin positions).

The actual liquidation price is independent on the leverage set for cross margin positions. However, the liquidation price does depend on leverage set for isolated margin positions, because the amount of isolated margin allocated depends on the initial margin set.

The precise formula for the liquidation price of a position is set forth in Hyperliquid's documentation and is

liq_price = price - side * margin_available / position_size / (1 - l * side)

where

l = 1 / MAINTENANCE_LEVERAGE . For assets with margin tiers, maintenance leverage depends on the unique margin tier corresponding to the position value at the liquidation price.

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Auto-Deleveraging:

Auto-deleveraging (ADL) is the final safeguard in the liquidation waterfall and exists to ensure system solvency under all conditions. It occurs only when both market and backstop liquidations (for Hyperliquid-native assets) fail to close a position that has become under-collateralized.

Remember: XYZ Assets are not protected by the Hyperliquid vault and therefore, if market liquidations fail, ADL will ensure system solvency.

In a perpetual futures market, every long is matched by a short, and all positions are collateralized with margin from a shared collateral pool. When a trader’s account equity or an isolated position value becomes negative, the system must rebalance by closing positions on the profitable side. Otherwise, the system would accrue bad debt and violate the zero-sum constraint that total long notional equals total short notional.

When ADL is triggered, users on the profitable side are ranked and selected for forced deleveraging based on a composite index that accounts for both profitability and leverage:

sorting_index = (mark_price / entry_price) * (notional_position / account_value)

Users with the highest ranking index (most profitable and most leveraged) are deleveraged first. Their positions are closed at the previous mark price against the insolvent side of the market. This transfer of position value ensures that aggregate system equity remains constant and that the platform has no bad debt.

While users affected by ADL are typically in profit overall, individual ADL events can occur at unfavorable prices. The system minimizes the frequency of ADL events through conservative maintenance margin settings and by routing most liquidations through market orders or, if necessary (only applicable for Hyperliquid native-perps), the Hypercore liquidator vault. ADL is therefore a rare, last-resort settlement mechanism.

ADL exists because liquidity and solvency must be preserved in a derivatives system, even when market depth and backstop capacity are exhausted.

In practical terms, ADL is similar to a system-wide rebalancing event that closes the loop when no external liquidity remains. It is mechanical, transparent, and non-discretionary. Every ADL event can be independently verified on-chain via Hypercore’s settlement records