Leveraged Liquidation Cascades

A leveraged liquidation cascade happens when the price of an asset drops to a level that triggers automated margin calls and liquidations for traders using borrowed capital. As these positions are force-closed by the protocol, they create additional sell pressure, which pushes the price even lower.

This lower price then triggers further liquidations, creating a self-reinforcing loop of selling. This is a common systemic risk in decentralized finance protocols where collateral ratios are strictly enforced.

Such cascades can cause prices to deviate significantly from the broader market average. They highlight the danger of high leverage in volatile asset classes.