In general, liquidation of a trading position can happen as a result of the following 4 events or their combinations:
- The price of a token A that a trader bought decreased.
- The price of a token B that a trader borrowed to make a leveraged swap increased.
- The position was open for too long, so the value of the debt taken for the position approached the value of the position.
- WOWswap’s community significantly increased Liquidation Margin parameter via Governance.
A liquidation event cannot happen by itself, it should be triggered by a margin caller – a person or a company that runs special software capable of tracing numerous leveraged trading positions and making timely liquidations.
Anyone can become a margin caller by running the liquidation software provided by WOWswap. In case of a successful liquidation, a margin caller receives a liquidation reward, calculated as a percentage of the total position size. The liquidation reward is defined via the Governance.
When a margin caller makes a liquidation transaction, WOWswap’s smart contract verifies whether the liquidation condition is satisfied, and, if so, proceeds with the liquidation. During the liquidation, all parties are paid according to the following order:
1. the margin caller gets a liquidation reward (LR)
2. then the liquidity pool receives the debt with accrued interest
3. if any funds are left, the trader receives the rest of the funds.