Rex Extinction (About Liquidation)
When Is a Rex in Danger?
Your Rex needs to maintain minimum health (maintenance margin) to survive. If their health drops too low, they won't make it! This is what we call liquidation.
I.e., Traders must maintain a minimum percentage of their position's value as collateral, which is called the maintenance margin. If this margin falls below this threshold, the position may be liquidated, which could lead to the loss of their collateral.
What Makes a Rex...Not Make It? 💀
When your Rex's health (remaining equity) gets too low to keep them alive, they won't survive.
I.e., In most cases, liquidation happens when the margin (remaining equity) no longer covers the minimum cost of keeping the position open.
Here's an example:
The user buys ("longs") 10 ETH at $2,500 per ETH.
They use an initial margin (collateral) of $4,000 and 6.25x leverage, giving them an initial position value of $25,000.
Liquidation Price = $4,000 / (6.25 * 10 ETH) = $2,900
Liquidation Price = Initial Margin / (Leverage * Position Size)
If the ETH price drops below $2,900, the unrealized loss will exceed the user's margin. At this point, the position will be liquidated, and the user's Rex will not survive.
However, if the user adds more margin (feeds Rex) to increase their health points, they can push out the liquidation price. For example, if the user adds another $1,000 in margin, bringing their total to $5,000, the new liquidation price would be $2,714.
New liquidation Price = $4,000 + $1,000 / (6.25 * 10 ETH) = $2,714.
Note: For short positions, the liquidation dynamics work in reverse - the liquidation price is the price at which the unrealized loss exceeds the margin, causing liquidation. The formula remains the same.
Pro Tip: Keep an eye on your Rex's health! The closer the liquidation price gets to the survival threshold, the more dangerous it becomes for your Rex. Feed them before it's too late! 🦖
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