Kyan's risk engine is designed to preserve solvency and protect the protocol from losses due to user defaults. Liquidation is the last-resort mechanism used to rebalance undercollateralized portfolios and minimize losses.
Liquidations Step by Step
When Maintenance Margin ratio (MMr) > 100%, the user can no longer trade (only deposit more collateral in USDC) and Kyan begins a structured three-phase liquidation process.
Step 1: Delta Hedging or Perp Liquidation
In this step, Kyan opens additional positions to offset the portfolio's directional exposure, unless the account is perp exposure only. For those accounts, Kyan will liquidate the entire position.
In most cases, this is sufficient to bring the portfolio back to a safe range without further action.
Step 2: Portfolio Decomposition
If delta hedging is not enough, Kyan decomposes the portfolio into simpler, liquidatable components. In this phase, the risk engine defines the risk of the individual legs and ranks the positions from largest risk to smallest risk.
Once positions are broken up, each exposure is ranked by its margin requirement in isolation. Positions that have the largest margin requirement are executed first.
Note: This step is only used for portfolios with options.
Step 3: Full Liquidation & Bankruptcy
If the portfolio still cannot be stabilized, the system begins full liquidation:
Positions are auctioned off at fair value, with a liquidation incentive added to attract counterparties.
If no takers appear, the incentive increases incrementally (every 1 minute for options, every 10 seconds for perps) until someone accepts the trade.
If still no one takes the positions, the account is flagged as bankrupt, and the insurance fund steps in to absorb the loss.
Click here to learn more about liquidations on Kyan.