Isolated Margin Liquidation Logic vs Cross Margin Liquidation Logic

Position-level isolation: Each leveraged position has its own collateral pool. A liquidation event only affects the assets in that specific position, shielding your entire portfolio. This is critical for hedging strategies or when trading highly volatile assets like memecoins.

Predictable liquidation price: The liquidation price is fixed at position opening, based solely on the collateral in that position. This provides clear, bounded risk for traders, making it ideal for beginners or manual trading on platforms like dYdX (v3) or GMX's isolated pools.

Portfolio-wide collateral: All assets in your account act as shared collateral for all positions. This reduces the frequency of liquidations and allows for higher effective leverage, a key advantage for sophisticated market makers and arbitrageurs managing multiple correlated positions.

Portfolio-wide liquidation risk: A single underperforming position can trigger a liquidation that consumes collateral from all your positions, even profitable ones. This domino effect is a major consideration for protocols like Aave or Compound, where it necessitates complex health factor monitoring.

Contained Risk Exposure: Liquidations affect only the specific, over-leveraged position. A 10x long on ETH can be liquidated without touching your separate BTC holdings. This is critical for hedge funds managing multiple uncorrelated strategies or retail traders experimenting with high-risk assets.

Inefficient Capital Use: Capital is siloed per position. A $10,000 account with $1,000 in a profitable ETH trade cannot use that unrealized profit as collateral for a new AVAX position without closing it first. This leads to lower portfolio-wide leverage and missed opportunities in fast-moving markets.

Maximum Capital Efficiency: All account equity acts as shared collateral. Profits from one position immediately increase buying power for others. This enables sophisticated strategies like basis trading or delta-neutral hedging on platforms like dYdX or GMX, where collateral fungibility is key.

Unified Liquidation Risk: A single losing position can trigger a full-account liquidation, wiping out all collateral. A sharp move in a small, volatile altcoin position can liquidate your entire portfolio, including profitable BTC holdings. This demands rigorous, real-time risk management.

Specific advantage: Positions are siloed with independent collateral pools. A single position's liquidation does not affect other open positions. This matters for multi-strategy traders and protocols that need to guarantee non-correlated risk, preventing a cascade failure across a user's entire portfolio.

Specific disadvantage: Capital is locked per position and cannot be used as collateral elsewhere. This leads to lower leverage potential and higher opportunity cost. This matters for sophisticated traders running hedged portfolios where unused collateral in one position could secure another.

Specific advantage: A single, shared collateral pool backs all positions, allowing for dynamic margin utilization and higher effective leverage. This matters for institutional market makers and arbitrageurs who need to maximize capital deployment across correlated assets (e.g., perpetual futures on dYdX or GMX).

Specific disadvantage: A sharp move in one asset can trigger a portfolio-wide margin call, liquidating all positions simultaneously. This matters for risk managers as it increases the potential for bad debt in the protocol and creates a more complex liquidation engine to handle cross-position health.