Forced Liquidations

Forced liquidations happen when a trader's margin account falls below the minimum required level, and the exchange automatically sells the collateral to cover the debt. This process is designed to protect the lender and the protocol from losses, but it can exacerbate market volatility.

When many liquidations occur simultaneously, it creates a cascade of sell orders that pushes the price even lower, triggering more liquidations. This feedback loop is a defining characteristic of high-leverage crypto markets.

Understanding the liquidation thresholds of a protocol is essential for risk management. Traders must ensure they have sufficient margin to withstand temporary price dips to avoid being liquidated at the worst possible time.