Liquidation Fees

Liquidation fees are the penalties charged to a trader whose position is forcibly closed by the protocol. These fees are designed to cover the costs associated with the liquidation process, such as the execution of trades to exit the position.

A portion of these fees is often diverted to the insurance fund to help build a buffer against future systemic losses. These fees are typically deducted from the remaining collateral before it is returned to the trader.

They act as an additional deterrent against excessive leverage and risky trading behavior. By making liquidation expensive, the protocol encourages traders to manage their own risk more responsibly.

It is a standard component of the economic design of most derivative exchanges.