How does Bybit's liquidation engine for contracts work?

Bybit’s liquidation system uses mark price, maintenance margin, and insurance funds to manage risk, with ADL as a backup during extreme volatility.

Aug 13, 2025 at 11:36 am

Understanding the Basics of Bybit’s Contract Liquidation Mechanism

Bybit’s liquidation engine is a critical component of its perpetual contract trading system, designed to manage risk when a trader’s margin balance falls below required maintenance levels. When a user opens a leveraged position, they are required to maintain a minimum amount of equity in their account relative to the size of the position. This is known as the maintenance margin. If the market moves against the position and the equity drops to this threshold, the liquidation process is triggered.

The system continuously monitors each open position using a metric called estimated liquidation price, which is calculated based on the current mark price, leverage, and position size. This price is visible on the trading interface and serves as a warning signal. Once the mark price reaches this level, the liquidation engine initiates the process to close the position automatically.

It is important to note that Bybit uses mark price-based liquidation rather than the last traded price. The mark price is derived from the average price of the underlying asset across major spot exchanges, often using indices and funding rate adjustments. This prevents manipulation and ensures liquidations occur under fair market conditions.

Role of Insurance Fund and Auto-Deleveraging (ADL)

When a position is liquidated, Bybit first attempts to close it via the insurance fund. This fund accumulates surplus from profitable liquidations—when a position is closed at a better price than the liquidation price, the difference is added to the fund. The insurance fund acts as a buffer to cover losses from deeply underwater positions, preventing the need to impact other traders.

If the insurance fund is insufficient or depleted during extreme volatility, Bybit activates the Auto-Deleveraging (ADL) system. ADL is a peer-to-peer risk mitigation mechanism where profitable counterparties are automatically selected to absorb the loss. Traders with high profitability and leverage are prioritized in the ADL queue. For example, a long position with high unrealized profit and high leverage is more likely to be matched against a liquidated short.

The ADL process reduces the deleveraged trader’s position size proportionally. Notifications are sent when a user is affected, and the system updates the ADL ranking indicator in real time. This transparency allows traders to manage their exposure and avoid being at the top of the queue by reducing leverage or closing partial positions.

Step-by-Step Breakdown of the Liquidation Process

• Triggering the liquidation when the mark price hits the estimated liquidation price
• Freezing the position and halting further trading on that contract
• Attempting to close the position via a liquidation order on the order book at the bankruptcy price or better
• Using the insurance fund to cover any shortfall if the liquidation price is worse than bankruptcy price
• Activating ADL if the insurance fund cannot cover the deficit, selecting opposing positions based on profitability and leverage
• Updating the user’s wallet balance and position status immediately after execution

Each step is executed within milliseconds, leveraging Bybit’s high-frequency matching engine. The bankruptcy price is a theoretical price at which the position’s loss equals the initial margin. Bybit aims to close positions at or above this price to minimize the need for external compensation.

During rapid market movements, slippage may occur, leading to partial or full liquidation depending on order book depth. Bybit employs a post-only mechanism for liquidation orders to prevent market manipulation, ensuring these orders do not act as aggressors unless filled passively.

Managing Risk: How Traders Can Avoid Liquidation

To avoid triggering the liquidation engine, traders must actively monitor their margin ratio and unrealized P&L. Increasing the available balance in the contract wallet can raise the maintenance margin buffer. Adjusting leverage is another effective strategy—lower leverage reduces the sensitivity of the position to price swings.

Setting stop-loss orders manually can preempt automatic liquidation. These orders function as conditional market or limit orders that execute when the price reaches a specified level. Unlike liquidation, stop-losses allow traders to define their own exit price, potentially preserving more capital.

Traders should also pay attention to the funding rate, as frequent payments can erode margin over time, especially in prolonged positions. High funding rates in one direction may indicate overcrowding, increasing the risk of sharp reversals that could trigger mass liquidations.

Using take-profit and trailing stop features helps lock in gains and reduce exposure without manual intervention. Bybit’s advanced order types support complex risk management strategies, enabling users to automate responses to market conditions.

Transparency and Real-Time Monitoring Tools

Bybit provides several tools to help users track liquidation risks in real time. The position panel displays the liquidation price, ROI, and maintenance margin for each open contract. The risk limit system on higher-tier contracts allows users to adjust maximum leverage by increasing their margin allocation.

The ADL indicator is shown as a color-coded bar next to each position, reflecting the likelihood of being deleveraged. Green indicates low risk, while red signifies high exposure. Users can click to view their current rank in the ADL queue.

Market data pages include liquidation heatmaps and aggregated liquidation levels, showing clusters of stop-loss and liquidation prices across the market. These visual tools help anticipate potential price shocks caused by cascading liquidations.

API access enables algorithmic traders to integrate liquidation price monitoring into their bots. WebSocket feeds deliver real-time updates on mark price, funding rate, and position status, allowing for immediate response to changing conditions.

Frequently Asked Questions

What is the difference between mark price and last traded price in liquidation?

The mark price is used to prevent unfair liquidations due to price manipulation or flash crashes. It is calculated using a basket of spot prices and funding rate adjustments. The last traded price reflects actual trades on Bybit’s order book, which can be volatile and misleading during low liquidity.

Can I withdraw funds during an active liquidation?

No. When a position enters liquidation, the system locks the associated margin. Withdrawals are restricted until all positions are settled and the account is in good standing. This ensures obligations are met before funds are released.

How does Bybit determine the ADL queue ranking?

The ADL ranking is based on a combination of unrealized P&L percentage and leverage level. Traders with higher profit relative to their position size and higher leverage are prioritized. The system updates this ranking dynamically as market conditions change.

Is it possible to get liquidated even with sufficient margin?

Under normal conditions, no. However, during extreme volatility or technical disruptions, price gaps may cause the mark price to jump past the liquidation threshold before the system reacts. This is rare but possible in fast-moving markets.