How crypto liquidations work, step by step

A crypto liquidation happens when a leveraged position has lost so much that the collateral left in it no longer covers the exchange's maintenance margin, so the exchange closes it by force. The sequence after that point is fixed by the venue's rules: first an attempt to close the position on the order book, then a backstop if that fails, and as a last resort a mechanism that closes profitable positions on the other side.

This guide walks through those steps, using the rules Hyperliquid publishes for its perpetual futures as the main example, because every step there is public and documented. Centralised exchanges follow the same broad pattern with different names and parameters.

What triggers a liquidation

Every leveraged position is backed by collateral, called margin. Two thresholds matter:

• Initial margin is what an exchange asks for to open the position. At 10x leverage it is one tenth of the position's value.
• Maintenance margin is the smaller amount the position must keep while it is open. It is the floor below which the exchange no longer lets the position run.

As the price moves against the position, unrealised losses eat into the margin. The account's equity (collateral plus unrealised profit or loss) shrinks. The moment equity falls below the maintenance margin, the position is liquidatable. On Hyperliquid the maintenance margin is half of the initial margin at the asset's maximum leverage, which puts it between 1.25% of the position value for assets with 40x maximum leverage and 16.7% for assets with 3x.¹

The price that decides this is not the last trade. Hyperliquid uses the mark price, a robust price that combines external exchange prices with its own order book, for margining and liquidations.¹ A single odd trade on the book does not liquidate anyone; the mark price has to get there.

The price at which equity meets the maintenance margin is the position's liquidation price. How that price is calculated, and why leverage moves it, is covered by our liquidation calculator, which applies the published formula to the margin tiers of each market it covers. How far a position currently sits from that price is defined on the distance to liquidation page.

Step one: the position is closed on the order book

Once a position is liquidatable, Hyperliquid first sends market orders to the order book for the full size of the position. If the position is closed, entirely or partly, so that the maintenance margin requirement is met again, any collateral that remains stays with the trader.¹

These orders always point in the direction of the move that caused them. A long is closed with orders against the bids, a short with orders against the asks. That is why many liquidations at nearby prices can add to a fast move, which is what a liquidation heatmap tries to show in advance.

Hyperliquid sends most liquidations to the book this way so that all users can compete for the liquidation flow and the liquidated trader keeps any remaining margin, and it charges no clearance fee on liquidations.¹

Partial liquidations

Large positions are not thrown at the book in one piece. For liquidatable positions larger than 100k USDC, only 20% of the position is sent as a market liquidation order. After a block in which any position of a user was partially liquidated, a cooldown of 30 seconds applies; during the cooldown, market liquidation orders for that user cover the entire position.¹

The point of the rule is to give the book time to refill between slices, so that one large account does not clear several price levels at once.

Step two: the backstop

Sometimes the book cannot absorb the orders fast enough, and the price keeps moving while the position is being closed. If account equity falls below two thirds of the maintenance margin without a successful liquidation through the book, Hyperliquid runs a backstop liquidation: the liquidator vault, a strategy that is part of the community vault HLP, takes the position over.¹

What moves to the liquidator depends on the margin mode:

• Cross margin. All cross positions and the cross margin of the account move to the liquidator. If the trader has no isolated positions, the account ends with zero equity.
• Isolated margin. Only that isolated position and its margin move. The trader's cross margin and other positions are untouched.

In a backstop liquidation the maintenance margin is not returned to the trader. Hyperliquid explains this as a buffer the liquidator vault needs so that backstop liquidations are profitable on average, and notes that the profit and loss from liquidations goes entirely to the community through HLP.¹

Step three: auto-deleveraging as the last resort

If an account's value or an isolated position's value turns negative, the losses have to be covered by someone. Hyperliquid's answer is auto-deleveraging (ADL): traders on the opposite side of the position, ranked by unrealised profit and leverage used, have their positions closed at the previous mark price against the underwater account, so the platform carries no bad debt. The docs state that a user with no open positions never shares in these losses.²

Centralised exchanges put an insurance fund in front of this step. Binance, for example, describes ADL as the last step of its liquidation process, used only when its futures insurance funds are unable to take over a bankrupt position.³

What the trader loses

Put together, the cost of a liquidation depends on how far the process runs:

Source for the table: Hyperliquid Docs.¹

On top of this, the closing orders themselves trade at whatever prices the book offers at that moment, so a liquidation in a thin or fast market fills worse than the liquidation price suggests.

How to see liquidations coming

A liquidation is mechanical, so it can be watched before it happens:

• Your own positions. Liquidation Guard watches a wallet address read-only and alerts when a position comes within a chosen distance of its liquidation price.
• The market. The liquidations page shows what was actually liquidated per hour, venue and coin; the heatmap shows where open positions would be liquidated next.

The usual ways to keep a position away from forced closing are documented by the exchanges themselves: Hyperliquid lists adding margin (isolated), depositing more collateral (cross) and reducing the position as the actions available to a trader whose position is losing.⁴

Limits of this guide

The numbers above are Hyperliquid's published parameters at the time of writing. Venues change maintenance margin rates, tier sizes and backstop rules, and each centralised exchange runs its own variant of the same sequence. Liquidation prices also move after a position is opened: funding payments and, in cross margin, the profit or loss of other positions shift them. Read each venue's own documentation for the exact rules of the market you look at.