Cross-Margin Liquidation

Cross-margin liquidation occurs when the collateral supporting multiple leveraged positions across a portfolio is collectively exhausted due to adverse market movements. Unlike isolated margin, where each position has a dedicated collateral pool, cross-margin allows profits from one trade to offset losses in another, increasing capital efficiency.

However, this structure creates systemic risk within the individual account, as a single failing position can drain the collateral for the entire portfolio. When the total maintenance margin requirement exceeds the available equity, the protocol automatically closes positions to prevent insolvency.

In crypto derivatives, this process is often executed by automated liquidation engines that sell assets into the market, potentially exacerbating price drops. Understanding the liquidation threshold is critical for traders using high leverage, as the interaction between different assets can lead to cascading closures.

This mechanism is designed to protect the protocol from bad debt, but it places the burden of risk management entirely on the user.