Liquidations and Auto-Deleveraging (ADL)
Liquidations and Auto-Deleveraging (ADL)
This page explains what happens if a position becomes under-margined on Dreamcash, and what can occur in extreme scenarios.
Dreamcash markets use USDT collateral and rely on mark price (not last trade) for margin checks and liquidations. See Trading -> Oracles and Pricing for how mark is constructed.
Key definitions
Initial margin
The collateral required to open a position at a given leverage
Maintenance margin
The minimum collateral required to keep a position open
Account equity
Your collateral plus unrealized PnL (based on mark price)
Liquidation
Forced reduction or closure of a position to prevent losses exceeding collateral
ADL
Auto-deleveraging, a last-resort mechanism that prevents bad debt in extreme cases
When do liquidations happen
A liquidation can occur when your account equity falls below the maintenance margin requirement.
A simple rule of thumb:
Higher leverage means less room for the price to move against you.
Approximate margin levels (20x markets)
Dreamcash markets typically support up to 20x max leverage. As a rough guide:
Initial margin at 20x is about 5% of notional
Maintenance margin is about half of the initial margin at max leverage, or about 2.5% of notional
Example:
If you open a 10,000 USDT position at 20x, you post about 500 USDT initial margin.
If losses reduce equity to about 250 USDT, you may enter liquidation territory.
The UI is always authoritative for the exact margin requirements.
The liquidation process
When an account becomes under-margined, the liquidation engine attempts to restore margin by closing risk through the order book.
Market liquidation orders
The engine sends market orders to reduce or close the position.
If margin requirements are satisfied after this process, any remaining collateral stays with you.
Partial liquidations for large positions
For positions above a notional threshold, the engine may liquidate only part of the position first to reduce market impact.
If the account remains under-margined shortly after, subsequent liquidation orders may target the full remaining position.
Why Dreamcash uses mark price for liquidations
Liquidations are based on mark price to make the system more robust than using only last trade or top-of-book prices.
In fast markets, mark price can differ from the last traded price. This is expected. Mark is designed to be harder to manipulate and more suitable for risk checks.
Important note for Dreamcash HIP-3 markets
Dreamcash markets are HIP-3 markets. These markets are not backstopped by a liquidator vault in the same way some platform-native markets may be.
Practical implication:
If market liquidations cannot fully resolve an under-collateralized account, ADL is expected to be the final solvency mechanism.
What is Auto-Deleveraging (ADL)
ADL is a last-resort solvency mechanism.
If an account’s value (or an isolated position value) becomes negative, the system must prevent bad debt. It does this by closing positions from traders on the profitable side of the market.
Important properties:
ADL applies to open positions, not idle balances.
ADL exists to ensure the system remains solvent under all conditions.
When can ADL happen
ADL is triggered only when the system cannot safely close risk through normal liquidation routes and an account would otherwise become bankrupt.
This is expected to be rare, but it can occur during:
extreme volatility
gaps and rapid repricing
insufficient order book liquidity during liquidation
Who gets selected for ADL
When ADL is triggered, traders on the profitable opposing side can be selected for forced deleveraging.
Selection is based on a ranking that prioritizes traders who are both:
more profitable, and
more leveraged relative to their account value
A commonly used ranking index is:
sorting_index = (mark_price / entry_price) * (notional_position / account_value)
Traders with the highest index are deleveraged first.
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