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How Liquidation Works

We liquidate your position when your health drops to 45%. Health measures how much equity you have left relative to your margin: 
Health = (Position Value - Borrowed Amount) / Margin × 100%
When you open a position, health starts at 100%. As the market moves against you, health decreases. At 45%, we close your position.

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Two-Phase Liquidation System

When a position reaches the liquidation threshold, we use a two-phase system designed to protect both the vault and the underlying market.

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Phase 1: Direct Liquidation

For smaller positions, we liquidate directly on Polymarket.
1

Position Sold

We sell your shares on Polymarket immediately
2

Vault Recovery

The vault recovers its borrowed capital
3

Margin Lost

You lose your remaining margin (no refund on liquidation)
This is fast and simple. For small positions, the market impact is negligible.

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Phase 2: Dutch Auction

For larger positions, selling directly on Polymarket would cause significant market impact—potentially triggering cascading liquidations or manipulating the underlying market. Instead, we run a Dutch auction.
Why not just sell on Polymarket? Large sells can move markets 5-10% or more. This hurts price discovery, can trigger other liquidations, and doesn’t get the best recovery for the vault. The Dutch auction solves all three problems.

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How the Dutch Auction Works

1

Auction Starts

The underwater position is listed at a starting discount from current market value
2

Price Decreases

The asking price decreases over time (the “Dutch” mechanism)
3

Liquidator Bids

The first liquidator to accept the current price wins the position
4

Shares Transfer

The position’s shares transfer directly to the liquidator’s account
5

Vault Recovers

The vault receives the liquidator’s payment, recovering its lent capital

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Why This Is Better

BenefitExplanation
No market impactShares transfer peer-to-peer, never hit Polymarket order books
No cascading liquidationsLarge sells can’t trigger other positions to liquidate
Better price discoveryCompetitive auction finds fair value for distressed positions
Healthier ecosystemCreates opportunity for liquidators, similar to DeFi liquidation markets
Position inherits the same close date. If you buy a liquidated position via Dutch auction, you inherit its original time-boxing. The close date doesn’t reset.

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Fallback to Phase 1

If no liquidator bids before the auction deadline, we fall back to Phase 1 and sell directly on Polymarket. This ensures positions are always closed promptly.

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What Happens to Your Margin

Liquidation is final. There’s no partial liquidation or margin call. Once you hit 45% health, the position closes entirely—either via direct sale or Dutch auction.
In both phases:
  • The vault recovers its borrowed capital first
  • Any auction discount or slippage comes from your remaining margin
  • You lose your remaining margin (no refund on liquidation)

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Avoiding Liquidation

Use Lower Leverage

5x gives you roughly twice the buffer before liquidation compared to 10x.

Watch Your Health

The dashboard shows real-time health for all positions.

Close Manually

If a trade isn’t working, exit before liquidation locks in the maximum loss.
At 10x leverage, a ~5.5% move against you triggers liquidation. Prediction markets can move 5% in minutes on breaking news. High leverage requires active monitoring.

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For Liquidators

Interested in participating in Dutch auctions? Liquidators play an important role in the Ultramarkets ecosystem by:
  • Providing liquidity for distressed positions
  • Earning discounts on positions they believe will recover
  • Helping maintain system health without market impact
Liquidator documentation and API access coming soon.