Shorts owe synth debt valued at the price index. If the index rises far enough against a position, its collateral no longer safely covers the debt and anyone may liquidate it.
The liquidation waterfall: collateral first, insurance for shortfall.The liquidation waterfall: collateral first, insurance for shortfall.

The liquidation waterfall: collateral first, insurance for shortfall.

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The collateral ratio

current_debt is the funding-adjusted debt (see Shorts). A position becomes liquidatable when:
With the default maintenance_cr_bps = 12000, that is CR below 120%. Positions are opened at or above initial_cr_bps (150% by default), so there is a buffer zone between the tightest permitted open and the liquidation threshold.
Liquidation checks use the index TWAP, never the AMM spot price. Pushing the AMM around does not liquidate anyone; only the oracle index, which is itself EMA-smoothed and breaker-guarded, moves CR. See Circuit Breaker.

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What happens in a liquidation

liquidate() is permissionless. In v1 it closes the full position in one call; there are no partial liquidations.
  1. The liquidator must hold the position’s full current debt in synth. The program transfers it from their wallet back into the market’s treasury reserve.
  2. The liquidator is paid from the position’s collateral:
  1. If collateral does not cover the target payout, the insurance fund tops up the difference, up to its available balance.
  2. Any collateral left after the payout is refunded to the position owner.
  3. The position’s debt and collateral are zeroed. The owner can later call close_position to reclaim rent.
With the default liq_bonus_bps = 500, the liquidator earns a 5% premium over the debt value they repaid.

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Sourcing the synth to repay

Liquidators need the debt amount in synth at execution time. The usual loop:
  1. Detect an underwater position (watch ShortChanged, IndexPushed, and FundingAccrued events, or poll positions).
  2. Buy the required synth on the market’s AMM.
  3. Call liquidate() in the same transaction bundle.
  4. Profit = payout minus synth cost minus fees.
Note that step 2 pushes the AMM price up, which is the correct direction: liquidations create buy pressure on the synth, not cascading sell pressure. See Running a Liquidator for a practical setup.

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Edge cases

  • Frozen market. Liquidations are blocked while a market is frozen. A bad oracle print should never liquidate anyone, so the breaker pauses liquidations along with everything else.
  • Stale index. Liquidations also require a fresh index: past max_index_age_secs without a push, liquidate returns IndexStale. Nobody should be liquidated against a price the oracle stopped standing behind. See the staleness guard.
  • Insurance exhausted. If collateral plus available insurance cannot reach the target payout, the liquidator receives whatever is available. Deeply underwater positions may briefly be unprofitable to liquidate; the bonus and the buffer between 150% and 120% exist to make that rare.
  • Debt rounding. Funding scaling can leave the current debt a few base units off the originally drawn amount. Always compute the repay amount from on-chain state, not from your records.
For position owners: withdrawals are held to the initial CR precisely so you cannot exit into the liquidation zone yourself, but a rising index or negative funding drift can still take you there. Watch your CR and top up with add_collateral, which works even while a market is frozen.