Liquidation Surplus

Liquidation surplus occurs when a position is liquidated at a price that is more favorable to the protocol than the trader's actual bankruptcy price. This surplus is the difference between the price at which the position was closed and the price at which the trader's equity reached zero.

Instead of returning this excess to the liquidated trader, the exchange retains these funds to bolster the insurance fund. This process serves as a secondary revenue stream for the platform's risk management infrastructure.

It is a critical source of funding that helps ensure the platform remains solvent during periods of high volatility. The size of the surplus is influenced by market liquidity and the speed of the liquidation engine.

Traders often view the consistent generation of liquidation surplus as a sign of a healthy and well-managed exchange. It effectively taxes the volatility of liquidations to provide a safety net for the entire trading ecosystem.