Perpetual Swap Liquidation

Perpetual swap liquidation is the process by which a crypto exchange closes a trader's position when their collateral falls below the required maintenance margin. Because perpetual swaps do not have an expiration date, they use a funding rate mechanism to keep the price anchored to the spot market.

If a trader's position loses too much value, the exchange's liquidation engine takes over, selling the collateral to cover the debt. This process is designed to protect the exchange and other users from bad debt.

However, large-scale liquidations can cause cascading effects, leading to rapid price drops and significant market volatility across the entire crypto ecosystem.