Definition

Liquidation Waterfall Logic

Meaning ⎊ The structured sequence of actions taken to secure collateral and cover debt during a borrower insolvency event.
Greeks.liveApril 12, 2026

Liquidation Waterfall Logic

Liquidation waterfall logic defines the sequence of events that occur when a borrower collateral ratio falls below a maintenance threshold. It outlines how the protocol seizes collateral, auctions it to cover debt, and potentially uses insurance funds if the collateral value is insufficient.

This mechanism is critical for maintaining the solvency of lending protocols. The waterfall must be designed to execute rapidly to prevent bad debt accumulation.

It often involves incentivizing third-party liquidators to perform the task in exchange for a fee. The efficiency of this logic directly impacts the stability of the protocol during market crashes.

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