Risk & Liquidations

The OrangeBit Risk & Liquidation System ensures platform solvency, trader protection, and market stability through a combination of real-time risk assessment, tiered margin requirements, and multi-stage liquidation algorithms.

It is designed to maintain fair and transparent trading while preventing cascading liquidations or system-level insolvency.

OrangeBit’s hybrid architecture combines off-chain risk computation for ultra-fast margin updates with on-chain verification and settlement through smart contracts — ensuring that all margin, PnL, and liquidation results are independently auditable.

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Margin Parameters

OrangeBit employs a dual-margin structure to manage trading risk:

Parameter	Description
Initial Margin (IM)	The minimum collateral required to open a leveraged position. Determines the maximum leverage available for a given trade.
Maintenance Margin (MM)	The minimum margin required to keep a position open. When equity falls below this level, liquidation may occur.
Liquidation Threshold (LT)	A multiplier (e.g., 1.05) applied to the required margin to define the exact liquidation trigger level.
Liquidation Penalty (LP)	A fee applied to positions that are forcefully liquidated, partially funding the insurance pool and covering protocol risk costs.

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Margin & Liquidation Logic

Risk parameters are continuously recalculated based on the trader’s open positions, unrealized PnL, and funding payments.

If a trader’s account equity drops below the required margin × liquidation threshold, liquidation is triggered automatically.

Simplified Algorithm (Pseudocode):

python

pos_value = abs(position_size) * mark_price
required_margin = pos_value / leverage

if account_equity < required_margin * liquidation_threshold:
    trigger_liquidation()

• position_size: total notional exposure of the user’s open position

• mark_price: fair market price derived from the OrangeBit composite oracle

• account_equity: total wallet balance + unrealized PnL

• liquidation_threshold: safety factor (e.g., 1.05 = 105%)

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Multi-Stage Liquidation Process

OrangeBit adopts a multi-tiered liquidation mechanism to reduce unnecessary user losses and maintain market stability:

1. Partial Liquidation

   • The system first closes only a portion of the position to restore margin above the maintenance requirement.

   • Prevents “one-shot” liquidation and large market impacts.

2. Full Liquidation

   • If account equity remains below the liquidation threshold after partial liquidation, the remaining position is closed entirely.

3. Bankruptcy Protection

   • If the account’s equity turns negative, the Insurance Fund covers the shortfall to ensure solvency.

   • In rare cases where the insurance fund is insufficient, the Auto-Deleveraging (ADL) system may reduce exposure from profitable counterparties, similar to professional derivatives exchanges.

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Reverse Liquidation Protection

To safeguard users during extreme volatility, OrangeBit employs Reverse Liquidation Protection, which includes:

• Temporary Trade Suspension (Circuit Breaker): When extreme price movements are detected, the matching engine can pause order matching for a few seconds to stabilize spreads.

• Slippage Control: A dynamic maximum slippage parameter is enforced during forced execution to prevent excessive liquidation losses.

• Oracle Cross-Validation: Prices are verified across multiple oracles to prevent oracle manipulation or flash crashes from triggering false liquidations.

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Insurance Fund

The OrangeBit Insurance Fund is an on-chain liquidity reserve funded by:

• Liquidation penalties (LP)

• A portion of trading fees from perpetual markets

• Optional ecosystem treasury contributions

Its role is to absorb negative balances from bankrupt accounts and maintain system integrity under all market conditions.

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Transparency & Auditability

• All margin, liquidation, and insurance fund operations are recorded on-chain and auditable in real time.

• OrangeBit cannot manually alter or reverse liquidation outcomes; all executions are governed by smart contract logic.

• Risk parameters (IM, MM, LT, LP) are dynamically adjustable through DAO governance once decentralized governance is live.

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The OrangeBit Risk & Liquidation System is built on the principles of transparency, user protection, and stability.

By combining on-chain verifiability with off-chain computational speed, OrangeBit achieves:

• Predictable liquidation behavior

• Protection against cascading failures

• Non-custodial, tamper-proof liquidation outcomes