Risk Tiers And Liquidation

Phoenix classifies trader accounts by comparing effective collateral against margin thresholds. As collateral falls, the account moves into progressively more severe risk tiers. Each tier gives the protocol stronger tools to reduce risk.

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Risk tiers

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Automatic SOL conversion

Automatic SOL conversion is separate from perpetual-position liquidation. It converts SOL collateral to USDC when your projected USDC debt becomes large relative to the margin value of your SOL. Phoenix calculates your projected USDC balance without unrealized PnL: $$Q_{\text{projected}} = C_{\text{USDC}} + F_{\text{unsettled}}$$ An unrealized loss on an open position does not trigger automatic SOL conversion. The loss affects this calculation after you close the position and it becomes part of your USDC balance. If $Q_{\text{projected}}$ is negative, the projected debt is: $$D = \left|Q_{\text{projected}}\right|$$ Phoenix divides that debt by the discounted margin value of your SOL: $$\text{debt ratio} = \frac{D}{V_{\text{SOL, margin}}}$$ By default, Phoenix can convert SOL in a cross account when this ratio is strictly greater than 50%. A ratio of exactly 50% does not qualify. An isolated account can qualify even below 50% after its position closes. Any negative unrealized PnL becomes a loss in the account’s USDC balance, and Phoenix sells deposited SOL collateral to cover it. Cross accounts always use the 50% threshold, even when they have no open positions.

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Conversion amount

Phoenix targets the projected debt plus a cushion of no more than 0.1%. For example, if the projected debt is 1,000 USDC, the target is no more than 1,001 USDC. Phoenix values the SOL at its index price, applies the conversion discount, and targets the smallest amount expected to provide the required USDC. Current risk constraints and available swap liquidity may limit the amount or delay execution.

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Liquidation types

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Market liquidation

For liquidatable accounts, Phoenix can reduce positions through market execution.

• executes against available liquidity
• can be partial
• must improve trader health or fully close the position
• respects market liquidation size limits

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Backstop liquidation

If market liquidation is not enough, Phoenix can transfer a distressed position to a backstop account.

• the backstop account absorbs the position
• the backstop account then unwinds the risk through normal market execution
• this path is used when orderbook liquidity is insufficient or the account is too distressed for ordinary liquidation

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ADL

ADL is the last-resort path.

• the losing position is matched against a profitable trader on the opposite side
• the highest-priority profitable trader is selected first
• the match closes or reduces both sides
• profitable traders affected by ADL may realize less profit than expected