Position Liquidation

Position liquidation is the actual process where a protocol sells a borrower's collateral to repay their debt after they have breached the maintenance margin. This process is typically automated by smart contracts and executed by external liquidators.

The liquidation mechanism must be efficient and fast to minimize the risk of the position becoming further under-collateralized. The liquidator is compensated for their work through a discount on the collateral, which creates a competitive market for liquidation services.

If the liquidation process is too slow or inefficient, it can lead to bad debt. Effective liquidation mechanisms are crucial for maintaining the solvency and integrity of any lending or derivatives protocol.

They are the mechanism by which the protocol enforces its risk management rules in a trustless environment. It is a critical technical component.