Liquidation Haircut

A liquidation haircut is a discount applied to the market value of collateral when calculating its value for the purpose of a forced sale during a margin call. When a trader's position becomes undercollateralized, the protocol must sell the collateral to recover the debt.

Because liquidating large positions can cause slippage, the protocol reduces the collateral's recognized value by a set percentage. This buffer ensures that the proceeds from the sale are sufficient to cover the outstanding loan and any associated penalties.

It acts as a protective shield for lenders and the protocol's insurance fund.