Impermanent Loss & Liquidation

Impermanent Loss (IL)

Impermanent loss refers to a situation where the price change of a token causes the value of your share in a liquidity pool to be less than the current value of your original deposit. It's called "impermanent" because this loss can potentially be recovered if the token pair's exchange rate returns to its initial level.

Liquidation

In leveraged trading scenarios, liquidation comes into play when the Debt Ratio of a position (the ratio of borrowed-to-owned value) surpasses a predefined threshold known as the Liquidation Threshold. When this threshold is breached, OpenWorld's liquidation process is triggered, leading to the closure of the position.

The liquidation ratio on OpenWorld's is 83.33% for most trading pairs (LTV ratio). This means that when the ratio between the debt value (Debt Value) of a trading position and the asset value (Position Value) exceeds 83.33%, the position will be liquidated. This ratio leaves a buffer of approximately 16.67% before the position is subject to liquidation. Note: that for stable trading pairs (stable pools), the LTV threshold is 90.00%.

The liquidation process involves the following steps:

1. Position Closure: Once the Liquidation Threshold is reached, OpenWorld initiates the liquidation process, causing the leveraged position to be closed.

2. Borrowed Funds Return: The funds that were borrowed for the position are returned to the lender.

3. Remaining Funds: After repaying the borrowed funds, the remaining amount (minus liquidation fees) is sent back to your wallet.

Equation:

Debt Value: Value of borrowed tokens

Position Value: Total farming value (Debt Value + Equity Value)

Equity Value: Position Value - Debt Value