Slippage and Liquidation Penalties

Slippage and liquidation penalties are the costs incurred by a trader when their position is forcefully closed in a market with insufficient liquidity. Slippage occurs when the execution price of the liquidation differs significantly from the market price due to the size of the order relative to the order book.

Liquidation penalties are additional fees charged by the protocol to cover the costs of the liquidation process and to incentivize liquidators to act. Together, these factors can significantly reduce the remaining collateral returned to the trader.

In extreme cases, high slippage can consume a large portion of the account equity. Protocols must carefully design these mechanisms to ensure that liquidations are efficient and that the costs do not unfairly punish users.

This balance is vital for the long-term viability of the trading venue.