Liquidation Protection
Synth Options have one feature that no traditional crypto option does: Built-In Liquidation Protection.
Last updated
Synth Options have one feature that no traditional crypto option does: Built-In Liquidation Protection.
Last updated
Crypto Option liquidation occurs when a trader's bet on the future price of a cryptocurrency is automatically terminated because they lack sufficient margin to cover potential losses.
This usually occurs when the market goes in the opposite direction of what the trader predicted, and the losses are more than the money they had promised as a safety net. To settle the losses, the assets the trader used as a safety net are sold (i.e. all of their collateral is lost). It's crucial for traders to watch their bets and the money they set aside closely to prevent this, especially since cryptocurrency prices can change very quickly and unpredictably.
Since 2020, there have been tens of billions of dollars in Crypto Option liquidations, and it's very normal for there to be $100 million+ liquidations in a single 24hr period during large market shifts.
You may see Crypto Option liquidations occur in real time below:
Synth Options prevent liquidation by making sure the collateral for their leveraged strategies never falls to the minimum level required by the exchange.
Instead of risking everything, the system automatically reduces the amount at risk (for example, the protection for Synth Put Options and the potential gain for Synth Call Options) by half repeatedly to avoid any chance of liquidation. Essentially, this method gradually reduces your position to keep it safe from being closed out. However, to keep your Synth Option at its original level of protection or potential gain, you need to add more collateral (keep enough money in reserve) to stay above 5% of the total amount at risk. If not, your protection or gain potential gets reduced by half.
