What Traders Should Know About Liquidation Penalties

When your perpetual futures position gets liquidated, many exchanges charge a "liquidation penalty" — a fee deducted from whatever collateral you have left. These penalties can range from 1% to 10% of your position size, turning a bad situation into a worse one. Not all exchanges charge this, and the difference can be significant.

What Is a Liquidation Penalty?

When your margin falls below the maintenance requirement, a liquidator closes your position. The liquidation penalty is an additional fee on top of your trading losses, charged at the moment of liquidation.

Example with a 5% liquidation penalty:

# You deposited $1,000 for a $5,000 position (5x leverage)

# Price moves against you — liquidation triggered

# Remaining collateral after losses: $200

Liquidation penalty (5% of $5,000) = $250

You receive: $0 (penalty exceeds remaining collateral)

Without the penalty, you would have received $200 back. The penalty turned a partial loss into a total loss.

Why Liquidation Penalties Exist

  • Incentivize keepers/liquidators: The penalty partially compensates the entity that runs the liquidation transaction.
  • Insurance fund contribution: Some exchanges route penalty fees to an insurance fund that covers socialized losses.
  • Discourage risky behavior: Higher penalties make traders think twice about running positions close to liquidation.

The Problem with High Penalties

  • They punish you for already being in a losing position
  • They can turn partial losses into total losses (as shown above)
  • They are often poorly disclosed — buried in documentation
  • They create an asymmetry: you lose more during liquidation than the market move would suggest

How to Check Before You Trade

  1. Read the fee documentation — look for "liquidation fee," "liquidation penalty," or "maintenance margin" sections.
  2. Check the contract code — on-chain protocols should have liquidation parameters readable on the block explorer.
  3. Calculate the worst case — if liquidated, how much would the penalty take from your remaining collateral?
  4. Compare across exchanges — this is an important differentiator that traders often overlook.

Exolane's Approach

Exolane charges 0% liquidation penalty. When you get liquidated:

  • Your position is closed at the current oracle price
  • Any remaining collateral stays in your account
  • If losses exceed your collateral, the protocol absorbs the bad debt (socialized losses do not fall on other traders)

Note: 0% liquidation penalty is the current setting. It is a configurable parameter that could theoretically be changed through governance (subject to the 7-day timelock). Verify the current value in the market contracts on Arbiscan.

Practical Advice

  • Always use stop-losses to avoid liquidation entirely when possible
  • Know the liquidation penalty before opening a leveraged position
  • Use lower leverage to keep your liquidation price further from the current price
  • Add margin proactively if a position is approaching liquidation

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