Socialized Loss System
Note: You need to understand "Insurance Fund" and “Tiered Liquidation" first.
Background
Why do losses occur after liquidation?
When forced liquidation occurs, because the investor has no margin to continue maintaining the position, the system takes over his position. However, since the positions taken over are still losing money, the liquidation engine must immediately transfer them to other users with margins, allowing him to bear the risk of price fluctuations. However, the emotional fluctuations in the market are huge, and it is often necessary to transfer the position at a very poor price, so this position has a huge loss.
Under normal circumstances, the worse the market sentiment, the greater the chance of a loss.
What is a socialized loss system?
Since the system is an intermediary, it is unable and unwilling to bear the risk of price fluctuations. This part of the loss needs to be shared by the insurance fund and profitable users.
Why do profitable users need to share losses?
In a fixed period, in a contract system, the money earned by some users is the money lost by other users. At the time of liquidation, the loser has nothing to lose, and the system takes over his position, but the winner continues to make money. The money these people earn has no source. This is the inner principle of loss after liquidation.
At this time, those who make profits cannot make so much, because those who lose money do not lose so much. So while the insurance fund can take out a part, another part still needs to be charged from the winners.
Why does the insurance fund need to share losses?
The insurance fund was created for this situation, see Insurance Fund for details.
Socialized loss rules
After the liquidation, the insurance fund bears a part of the loss, and the remaining part is shared by the user's profit position, which will reduce the user's profit but will not cause a loss.
Screening of profitable positions
We will count all profitable positions in this settlement cycle and rank these positions by profit. We will start looking for the position with the most profit. If the accumulated profit amount accounts for 90% of the total profit amount of the settlement system, we will stop searching. The positions we find will participate in this sharing. The purpose of this is to avoid those positions with small profits from participating in the sharing, and only let the large profitable accounts be allocated to reduce the long tail of the sharing.
Socialized loss rules
Socialized loss amount of this position = amount of part of the position that the user needs to bear * profit amount of this position in this settlement cycle / total profit amount of all profitable positions in this settlement cycle
After the user participates in the sharing, there will be a type of sharing in the fund flow for the query.
Why not use automatic deleveraging (ADL)?
Advantages of automatic deleveraging (ADL)
Few users are affected by the losses after liquidation, and those who participate are the leading profit-seekers.
Disadvantages of automatic deleveraging (ADL)
ADL will automatically close the positions of the top profit users, which will hurt the big profit players. The positions held will be closed without knowing it, and it is often when the profit is about to expand.
Why do we choose the socialized loss system instead of ADL?
Because its shortcomings are too serious, it is a very abrupt behavior to automatically close the user's position, which seriously affects the operating experience of large traders.
Last updated