Portfolio Under-Collateralization

Portfolio under-collateralization happens when the total value of a user's collateral is insufficient to cover the maintenance margin requirements of their open positions. This state is the direct trigger for liquidation events in derivatives trading.

As market conditions change, the maintenance margin requirement can increase, or the value of the collateral can decrease, leading to an under-collateralized state. If the user does not add more collateral, the protocol will automatically begin liquidating the positions.

This process is essential for protecting the protocol from loss but can be highly disruptive for the trader and the market if large positions are involved.