Liquidation
Liquidation protects the vault from positions that have lost more than their collateral can cover. It is triggered by keepers via the permissionless execute batch function.
Liquidation Condition
A position is liquidatable when its equity falls below the liquidation threshold:
liq_fee is a per-market configurable parameter in MarketConfig (SCALAR_7), capped at MAX_LIQ_FEE (25%). The total_fee includes accrued funding and borrowing. A position can become liquidatable purely from fee accrual, even if the underlying price has not moved.
Margin Gap
There is a structural gap between initial margin and liquidation threshold:
| Margin Type | Rate | Source |
|---|---|---|
| Initial margin | Configurable per market (margin) | MarketConfig |
| Liquidation threshold | Configurable per market (liq_fee) | MarketConfig |
The validation rule margin > liq_fee enforces a buffer between the opening margin requirement and the liquidation threshold.
Liquidation Execution
When a keeper submits a position via the execute batch, the contract checks whether equity < liq_threshold. Unlike a normal close, there is no PnL payout to the user.
The position's remaining collateral is redistributed: liq_fee = max(equity, 0) is the remaining equity. The treasury receives revenue * treasury_rate / SCALAR_7 where revenue = min(protocol_fee + liq_fee, col). The keeper receives min(trading_fee + liq_fee, col) * caller_rate / SCALAR_7. The vault receives col - treasury_fee - caller_fee. There is no MIN_OPEN_TIME enforcement, so a position can theoretically be liquidated in the same block it was opened if parameters are at extreme values.
The position is removed from storage, market stats are decremented, and the contract emits Liquidation { market_id, user, position_id, notional, price, base_fee, impact_fee, funding, borrowing_fee, liq_fee }. The notional is the post-ADL settled notional, which may be smaller than the original position size if ADL has occurred since fill.
Underwater Liquidations
Zenex is a synthetic perp protocol: the vault holds only the collateral token (USDC), never the underlying asset that positions reference. There is no traditional insolvency risk because the vault has no debt obligations beyond paying PnL from its USDC balance, and a trader's downside is always capped at their posted collateral.
What can still happen is a per-position drawdown for the vault. If a fast price move makes a position's loss outrun its collateral before a keeper triggers liquidation, the vault collects only the remaining collateral, which may be less than the position's negative PnL would otherwise warrant. The difference is absorbed by the vault as a USDC drawdown. The maintenance-margin buffer (margin > liq_fee) and MAX_LEVERAGE cap make this rare in normal conditions, but volatile assets and gaps can produce it.
In aggregate, the protocol prevents the vault from running out of USDC through two further mechanisms: the circuit breaker transitions the contract to OnIce at 95% utilization to block new positions from compounding the imbalance, and auto-deleveraging proportionally reduces winning positions when realized payouts would exceed available vault balance.
Liquidation Incentives
Keepers earn caller_rate (a percentage of trading fees plus liquidation fee) for each successful liquidation. This incentivizes timely liquidation, which keeps per-position drawdowns small. The fee is capped at the position's collateral to prevent the keeper fee from exceeding available funds.
Since the execute function is fully permissionless (no authentication required), anyone can run a keeper bot and earn liquidation fees.