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A summary of Paradex liquidation mechanism
As a consequence of the Periodic Health Check, an account can be marked Unhealthy.
Once a liquidation request is submitted by a Liquidator, an unhealthy account enters the Liquidation Mode (i.e. pending liquidation).
Currently, Paradex does not support External Liquidation. All liquidations are handled internally by the Insurance Fund.
Upon liquidation of an account all the account's positions are transferred over to the Insurance Fund. The Insurance Fund closes the acquired positions on the market, incurring any losses from potential adverse price moves.
The Insurance Fund serves as a backstop to minimise the risk of socialized losses. It prevents the propagation of risk from bankrupt accounts toward the rest of the market.