Risk Engine and Liquidations

Overview

Amplifi's risk engine protects lending pools from bad debt by liquidating positions before the loan exceeds the value of the collateral. Unlike protocols that use static liquidation ratios, Amplifi computes liquidation prices dynamically based on real-time orderbook conditions.

The risk engine has three layers:

1. Equity-based threshold (Layer 1): Use the market's configured retained-equity buffer to set the base trigger
2. Fee-adjusted computation: Liquidation price accounts for CLOB taker fees via a quadratic formula
3. Depth adjustment (Layer 3): Liquidation price tightens when orderbook liquidity is insufficient to execute the sale

Click to see market specific liquidation parameters

Liquidation price calculation

Base formula

For a leveraged position:

badDebtPrice   = entryPrice - (equity / shares)
liquidationPrice = entryPrice - (equity × (1 - layer1) / shares)

Where:

• equity = margin - accruedInterest
• layer1 is the market's configured liquidation buffer (for example, 0.20 retains a 20% buffer and uses a 0.80 loss factor)
• badDebtPrice = the price at which the loan would not be fully repaid

With positive remaining equity, the liquidation price is above the bad debt price; this gap is the safety buffer.

Fee adjustment

Polymarket charges taker fees on sells. The fee formula is non-linear: fee = shares × rate × price × (1 - price). Amplifi solves a quadratic equation to find the price at which net proceeds (after fees) equal the loan plus the Layer 1 buffer.

When the applicable exit fee rate is positive, the calculation adjusts for that estimated cost. A zero fee rate gives the linear formula above. A quote is an estimate: actual fills, fees, and the liquidation penalty determine the cash remaining after execution.

Interest adjustment

As interest accrues on the loan, equity decreases. The risk engine recomputes the liquidation price every minute using current accrued interest, not the interest at position open. Over time, the liquidation price drifts closer to the current price.

Depth adjustment

The most important differentiator. Static liquidation ratios assume infinite liquidity — in practice, selling 1,000 shares into a thin orderbook moves the price significantly.

Amplifi's depth adjustment works as follows:

1. Measure bid-side depth between the current price and the bad debt price
2. Compare to required depth: requiredDepth = positionSize × depthMultiplier
3. Compute depth ratio: depthRatio = min(actualDepth / requiredDepth, 1)
4. Adjust the liquidation price:
   • Full depth → liquidation price stays at the base level
   • Zero depth → liquidation price moves above the base level by the full buffer distance (maximum tightening)
   • Partial depth → linear interpolation between the two

maxAdjustment     = baseLiqPrice - badDebtPrice
adjustedLiqPrice  = baseLiqPrice + (1 - depthRatio) × maxAdjustment

Why this matters: A $500 position in a market with $50 of resting bids will have a much tighter liquidation price than the same position in a market with $5,000 of bids. The risk engine adapts to the actual execution environment, not a theoretical model.

📝 Note

Depth adjustment transitions and illiquidity warnings use a 60-second per-position cooldown to prevent oscillation.

Price resolution

The risk engine resolves prices through a 3-tier fallback:

1. WebSocket best bid — real-time, preferred source
2. REST best bid — rate-limited fallback when WS is disconnected
3. Last known price — used temporarily with an alert to the operations team

Liquidation uses best bid exclusively — not mid-price. This is the price at which the position could actually be sold.

Liquidation execution flow

When the price monitor detects that a position's price has breached its liquidation threshold:

1. Flag position

   Position is added to the in-memory liquidation set and marked as liquidating in the database. This prevents duplicate liquidation attempts.

2. Sell shares

   Market sell order is placed on the Polymarket CLOB. If the order fails (thin book, temporary issues), the executor retries up to 5 times with exponential backoff (1s, 2s, 4s, 8s, 16s).

3. Confirm settlement

   After each fill, the executor waits for trade confirmation to capture the actual exit price and fee amount.

4. Repay loan

   All coupled loans are repaid from the sale proceeds. Positions may have multiple loans if they were merged.

5. Apply penalty

   Liquidation penalty is computed as a percentage of the position's initial margin (currently 10%), capped at the remaining equity, and transferred to the protocol fee address.

6. Finalize

   Position is marked as LIQUIDATED. Remaining equity (after loan repayment and penalty) stays in the user's deposit wallet.

Dust positions

Positions with fewer than 0.01 shares or less than $1 in notional value are finalized without further sell attempts. The Polymarket CLOB has minimum order size requirements that make tiny positions unsellable.

Cooldown on failure

If all retries exhaust without a successful sale, a cooldown period prevents the executor from immediately re-attempting. The cooldown starts at 5 minutes and doubles on consecutive failures, up to an 80-minute cap. This prevents the liquidation loop from blocking other positions.

Bad debt

If the sale proceeds are less than the loan principal, the shortfall is first covered by available cash in the trader's account. Any remaining difference is bad debt — a loss absorbed by the lending pool.

Amplifi minimizes bad debt through:

• Market-specific Layer 1 equity buffers
• Fee-aware liquidation pricing
• Depth-adjusted triggers (tighter threshold when liquidity is thin)
• Fast execution (sub-second price monitoring, immediate sell orders)

Bad debt is not zero-risk. It is the fundamental risk that lenders accept in exchange for yield. Amplifi's architecture makes it rare and bounded — not impossible.