Simulate how collateral price drops affect your position health.
High Risk. 1-Sigma move kills this.
Volatile markets often 'wick' down to flush leverage. Aim for a 20% buffer above the 1-Sigma line.
If your 'Drop to Liquidate' distance is less than a 3-Sigma move, you are exposed to flash crashes.
We use a Standard Deviation model (Sigma) based on your daily volatility input to calculate the probability of survival. 1-Sigma covers 68% of moves, 2-Sigma covers 95%, and 3-Sigma covers 99.7%.
Liquidation occurs at Hf = 1.0. This tool identifies the exact price drop required to hit that point. In crypto, volatility is non-linear, so a 10% drop can quickly become 30% due to liquidations.
When major positions are liquidated, they dump collateral onto the market, causing further price drops. This 'death spiral' is why 3-Sigma events (extreme moves) happen more often than standard models predict.
Lending protocols use price oracles (like Chainlink). During high volatility, the oracle price might be higher than the price you can actually sell at on an exchange, leading to 'underwater' liquidations.
Maintain a health factor that can survive at least a 50% market crash. This generally means an LTV of less than 40% for volatile assets like ETH or BTC.
