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NODE/03 · Term

Liquidation Penalty

Fee charged by a lending protocol or perp exchange on a forced liquidation. On TON protocols like EVAA and Storm Trade usually 5-10% of liquidated size.

Aliases: liquidation-penalty, liquidation fee

Liquidation Penalty is a fee a lending protocol or futures exchange takes from a user on forced closure of their position. On TON protocols like EVAA and Storm Trade typically 5-10% of liquidated size.

Why it exists

Liquidation penalty serves three functions:

  1. Compensates the liquidator. A bot (or live user) that monitors the chain and triggers liquidation when someone’s position crosses the threshold. Liquidator gets a slice (usually 50-80%) of the penalty for the work.
  2. Covers protocol risk. During sharp volatility collateral price can fall faster than liquidators react. The penalty forms a buffer to cover slippage and oracle lag.
  3. Disincentivises risky positions. Users know: high LTV means expensive liquidation. Encourages more conservative leverage.

How it’s calculated

Simple formula:

Penalty = liquidated_collateral_value × penalty_rate

Example: you borrowed 1000 USDT against 2000 TON collateral ($10,000). TON drops 35%, collateral is worth $6,500. Health Factor crossed 1, liquidation triggers.

  • Protocol sells part of TON collateral to repay USDT debt (1000 USDT).
  • Additionally takes 7% penalty (example) = $70 of the liquidated amount.
  • Of this penalty 60% goes to the liquidator ($42), 40% to the protocol insurance fund ($28).
  • You’re left with: $6,500 (collateral) − $1,000 (debt) − $70 (penalty) = $5,430.

Without liquidation (if you’d topped up collateral or repaid debt in time) you’d have those $6,500 minus only interest accruals. Penalty is the explicit cost of liquidation.

Per TON protocol

  • EVAA: 5-10% penalty (asset-dependent; TON ~7%, USDT ~5%).
  • DAOlama (NFT lending): 10-15% on NFT collateral liquidation.
  • Storm Trade (perps): 0.5-2% for longs and shorts; liquidation is fast.
  • Tradoor (perps): similar 1-2% liquidation fee.

How to avoid

  1. Don’t max out LTV. Allowed to borrow up to 70% — borrow 40-50%.
  2. Monitor Health Factor daily. Set alert at HF < 1.5.
  3. Hold USDT reserve for top-up on drawdown.
  4. Close the position early if market moves against you. Better to lose a bit to slippage than 7-10% to liquidation.
  • Health Factor (the trigger)
  • Collateral (what gets liquidated)
  • Liquidator bots (who executes)
  • LTV / Collateral ratio (how close to liquidation)

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