Cross-Protocol Liquidation

Cross-protocol liquidation occurs when a user's position is liquidated in one protocol, causing a chain reaction that triggers liquidations in other connected protocols. This happens because users often collateralize assets in one system to borrow against them in another.

If the collateral value drops, the borrower must be liquidated to protect the lender. Because this process is automated, the sudden sale of large amounts of assets can drive prices down further, impacting the collateral values of other users across the DeFi landscape.

This creates a systemic contagion where individual borrower distress turns into a market-wide liquidity crisis. Managing this risk requires understanding the complex web of cross-protocol dependencies that exist today.