Liquidity providers are traders that take over positions that failed the Liquidation process. They all have a high amount of margin deposited with the exchange, decreasing the chance of them entering Liquidation themselves.
The liquidity providers hedge their exposure to the underlying asset of the position. This can be through another position on a different exchange, or in a different market. Anyone with access to a sufficient amount of capital can become a liquidity provider.
A liquidity provider will take over a position if the Mark Price reaches the Failure Price of the position. The position will be taken over at the Bankruptcy Price. This gives the liquidity provider some time to hedge his exposure, before the Mark Price potentially goes beyond the Bankruptcy Price (at which point he will be in a loss).
Interested in becoming a liquidity provider? Please contact us directly at firstname.lastname@example.org.
What if no liquidity provider can be found? Will there be clawbacks?
If no liquidity provider can be found, the Mushino Insurance Fund will take over the position. The Mushino Insurance Fund will then aggressively attempt to close the position, potentially incurring losses. Any losses incurred from this are debited from the balance of the Insurance Fund. Any profits gained are credited to the balance of the Insurance Fund.
If the balance of the Insurance Fund ever reaches 0, a Deleverage will take place. The Deleverage system attempts to limit socialized losses by preemptively closing out bankrupt positions. In case that the Insurance Fund has a balance of zero, there are no liquidity providers, and the price crashes to zero, all of the existing positions will simply be closed out automatically. Note that such a crash is unlikely to happen in practice due to the way that Mushino combats price manipulation. It would require the majority of the top spot exchanges to be affected by the crash simultaneously. A crash on a single exchange, like the one that was seen on GDAX in 2017, would not affect the trading on Mushino.