Deleveraging Cascade

A deleveraging cascade is a systemic event where the forced liquidation of leveraged positions triggers a chain reaction of further liquidations across the market. This often begins when a protocol or exchange triggers margin calls due to a sharp drop in asset prices.

As positions are closed, the resulting sell pressure forces prices even lower, hitting the liquidation thresholds of other participants. This cycle continues until the leverage is purged from the system or a circuit breaker halts the process.

In crypto, this is exacerbated by the interconnectedness of lending protocols and derivative platforms, where collateral is often reused. This phenomenon is a primary driver of contagion risk, as the failure of one protocol can propagate systemic shocks to others.

Understanding the mechanics of these cascades is crucial for assessing systems risk and the robustness of margin engines. It represents a violent form of market correction where over-leveraged participants are removed.