Tiered Liquidation Mechanism

The Tiered Liquidation Mechanism is part of Hotcoin's liquidation risk management system. It is designed to reduce the market impact of liquidating large positions while minimizing the risk of negative account balances. When a position becomes eligible for liquidation, the system will not immediately liquidate the entire position at once. Instead, it will first attempt to reduce the position size through partial liquidation in order to bring the position down to a lower risk tier. If the margin ratio meets the requirements of the new risk tier after partial liquidation, the liquidation process will stop. Otherwise, the system will proceed with the next round of partial liquidation.

1. When Is Tiered Liquidation Triggered?

Tiered liquidation may be triggered when a position's margin ratio falls below the maintenance margin and estimated liquidation fee requirements for its current risk tier.

If the current position size still exceeds the maximum position limit of a lower risk tier, the system will proceed with partial liquidation rather than liquidating the entire position at once.

2. How Does Tiered Liquidation Work?

Once tiered liquidation is triggered, the system will first calculate the portion of the position that must be reduced to move down one risk tier, and then initiate forced partial liquidation.

During the forced partial liquidation process:

• The affected positions will be temporarily frozen
• Users will temporarily be unable to manage related futures positions

The system will then check the liquidation result:

• If the partial liquidation succeeds and the margin ratio returns above the requirement of the new risk tier, the liquidation process will stop
• If the order is not fully filled, or if the margin ratio still does not meet the requirement of the new risk tier after partial liquidation, the system will cancel any remaining unfilled orders and proceed with the next round of partial liquidation

This process will continue until the position risk returns to a manageable level.

3. Tiered Liquidation Example

Using BTC/USDT futures as an example, assume the platform's risk tier rules are as follows:

• Tier 1: Maximum position size of 500 contracts
• Tier 2: Maximum position size of 1,000 contracts

If a user currently holds a position of 600 contracts, the position is classified under Tier 2.

If the system detects that the position's margin ratio has fallen below the maintenance margin and liquidation fee requirements of the current tier, it will not fully liquidate all 600 contracts at once. Instead, it will first attempt partial liquidation.

The system will calculate the reduction required to move down one risk tier:

• Current position: 600 contracts
• Tier 1 maximum position size: 500 contracts
• Required reduction: 100 contracts

The system will then place a forced partial liquidation order for those 100 contracts.

Based on the result, the system will determine whether another round of partial liquidation is required:

• If the partial liquidation succeeds and the margin ratio returns above the Tier 1 requirement, the liquidation process will stop. Once the process ends, the position freeze will be lifted and the user can resume normal futures trading.
• If the margin ratio still does not meet the Tier 1 requirement after partial liquidation, the system will cancel any remaining unfilled orders, recalculate the required reduction amount, and place the next round of partial liquidation orders until the position risk returns to a manageable level.

Risk Reminder: Users are encouraged to closely monitor their margin ratios and risk tier status, use leverage responsibly, and keep position sizes within manageable limits to reduce liquidation risk.