What Is the Function of the ‘Liquidation Penalty’ Fee?
The liquidation penalty fee is a charge levied on a trader whose position has been forcibly closed by the liquidation engine. The primary function is to deter traders from taking excessive risk that could lead to a deficit.
A portion of this fee is often directed to the insurance fund to help replenish it, while the rest may cover operational costs.
Glossar
Liquidation Penalty Fee
Liquidation ⎊ The imposition of a liquidation penalty fee within cryptocurrency derivatives, options trading, and broader financial derivatives represents a consequence of margin calls exceeding available collateral, triggering automated asset sales to cover outstanding obligations.
Penalty
Consequence ⎊ A penalty within cryptocurrency, options trading, and financial derivatives typically represents a financial disincentive imposed for non-compliance with contract terms or exchange rules.
Liquidation Penalty
Imposition ⎊ The penalty is a fee or discount applied to the proceeds of a forced sale of collateral during liquidation, designed to compensate the protocol or the liquidator for the operational cost and market disruption caused by the default.
Penalty Fee
Incentive Fee ⎊ A Penalty Fee is a charge levied against a market participant for violating a specific protocol rule, such as failing to meet a margin requirement on time, exceeding a transaction limit, or attempting to use stale data.