Cascading Liquidation

A cascading liquidation is a systemic event where the liquidation of one large position triggers a sharp drop in asset prices, which then causes other positions to hit their liquidation thresholds. This creates a feedback loop of forced selling, further driving down prices and triggering even more liquidations.

This phenomenon can lead to rapid market crashes and significant protocol losses if the system cannot absorb the sell pressure. It is a major risk in highly leveraged environments where positions are tightly interconnected.

Effective risk management, such as gradual liquidation and sufficient liquidity buffers, is designed to prevent these spirals. The event highlights the danger of high leverage and thin market depth.

It is a primary concern for protocol designers and risk managers.