LIQUIDATIONS AND PROTECTION ROUTINES

Forced reduction is a ladder, not a single switch. The engine prefers the lightest intervention that restores solvency: a staged partial close at the margin floor before a full liquidation, the insurance pool before any socialized loss, ADL only as a last resort when normal liquidation cannot find liquidity at the mark.

#How stressed markets are handled

The runtime scans every account's maintenance margin against the current mark continuously. When an account crosses the maintenance floor, it becomes a liquidation candidate inside the same transition that priced the move — there is no polling lag between the price advance and the flag. If a partial reduction is sufficient to restore solvency, the engine takes it first: a portion of the position is closed at the mark, the liquidation fee is attached only to the closed slice, and the remaining size stays open under a tighter margin window.

If the partial path cannot restore solvency, the engine escalates to a full liquidation. The closed loss settles against the account's remaining equity. The liquidation fee splits 50% to the keeper that triggered the close and 50% to the insurance pool after any bad-debt offset. If the realized loss exceeds the account's posted margin, the residual is drawn from insurance before any socialization is considered. The insurance pool is funded by the same fee, funding-admin, and prior liquidation flows the engine has already collected, so the buffer that absorbs stress is funded by the activity that produces it.

ADL is the last resort. It runs only when ordinary liquidation cannot clear the bad position at the mark and insurance cannot absorb the residual — typically during a gap move or a stress event when the vAMM cannot absorb the unwind without exceeding inventory caps. ADL closes selected winning counterparties at the mark, not at their stops, to clear the residual exposure. While the protection ladder is running, the market posture itself tightens: the venue can drop into reduced or close-only to prevent fresh size from arriving into a book that is still unwinding.

 maintenance margin breached
   -> liquidation candidate flagged inside the same transition
   -> staged partial close at mark if it restores solvency
   -> full liquidation if partial is insufficient; liquidation fee attached
   -> 50% keeper / 50% insurance split after bad-debt offset
   -> insurance pool absorbs residual loss before any socialization
   -> ADL of winning counterparties only if insurance cannot cover
   -> posture may drop to reduced / close-only while recovery proceeds

#Why protection lives inside the engine

Forced reduction cannot be a separate microservice that wakes up after a loss. It has to share the exact state, priority order, and timing guarantees as the matching layer — otherwise a liquidation can fire against a stale margin snapshot, an ADL can pick a counterparty whose position has already moved, or an insurance draw can settle against numbers that have drifted from the engine's view. Dexter keeps liquidation, insurance flow, ADL selection, and post-stress rebalance inside the same engine domain as matching, funding, and posture changes. That is what makes stress behavior deterministic: the same maintenance margin number, the same mark, the same fundingAccrued, the same inventory cap — across the voluntary close path and the forced close path alike.

#How to stay out of liquidation during the challenge

• Drawdown rules fire before liquidation in most cases. -4% on close-to-close equity and -8% from the high-water mark are stricter floors than maintenance margin. Respect the drawdown rules and you almost never see a liquidation. Ignore them and the liquidation fee on top of the realized loss makes the rule break decisive — there is no recovery from a liquidation inside the same 30-day attempt.
• Watch maintenance margin, not initial. The engine flags candidates the moment maintenance crosses the floor. Sizing to initial margin and getting flagged on a 1.5% adverse move is the most common pattern in blown attempts — plan with a meaningful buffer between your worst-case mark and the maintenance line.
• Crowded markets liquidate first. Maintenance pressure rises on directions with crowded open interest. A long into a 90/10 long-biased book has a narrower liquidation window than a long into a balanced book — same notional, tighter floor. The leaderboard does not reward fighting the skew; the protection system is what enforces that fact.
• ADL is rare but binding. If your position is selected for ADL during a stress event, the close happens at the mark, not at your take-profit or stop. Plan max-loss assuming a stop might not fire and ADL might close you at the wrong end of a fast move. Winners get ADL'd; losers get liquidated. Both close at mark.
• Forced close = realized loss = drawdown event. The liquidation fee plus the realized loss together count against the -4% daily and -8% total drawdown. There is no "the engine did it, not me" carve-out — equity is what the rule checks, and the engine treats forced closes as ordinary state transitions for that purpose.
• Insurance protects the venue, not your attempt. The 50% of the liquidation fee that lands in insurance, and the residual loss absorbed by the pool when you blow up, keep the venue solvent for other traders. Your attempt is already over by the time insurance gets involved — by definition, you crossed maintenance.

Two disciplines, not one: stay inside the drawdown rules so you never approach the liquidation line, and stay inside maintenance margin so a sudden gap or session reopening cannot wipe you before the rule even fires. Clearing one without the other is not enough.