Liquidation Waterfall Mechanisms

Liquidation Waterfall Mechanisms define the sequential order and method by which a protocol closes out under-collateralized positions to prevent system-wide losses. When a trader's margin falls below a critical level, the system initiates a series of actions, typically starting with partial liquidations to restore the margin balance.

If these fail to stabilize the position, the protocol may proceed to full liquidation, often utilizing automated bots or designated liquidators to execute the trades. The waterfall ensures that the most efficient methods are attempted first to minimize market impact and slippage.

It is a critical component of protocol physics, ensuring that bad debt does not propagate through the system and threaten other users.