Liquidation Triggers

Liquidation triggers are predefined conditions within a smart contract that automatically initiate the sale of a user's collateral if their position becomes under-collateralized. In derivative markets, these triggers are essential for protecting the solvency of the protocol and ensuring that there is always enough capital to cover potential losses.

When the market price of an asset moves against a trader's position, the liquidation trigger checks the health factor of the account. If it falls below a specific threshold, the protocol executes the liquidation process, often incentivizing third-party liquidators to close the position.

This mechanism prevents the buildup of bad debt and maintains the overall stability of the decentralized financial ecosystem.