Slippage during Liquidations

Slippage During Liquidations occurs when the market price moves significantly during the execution of a liquidation order, resulting in a worse-than-expected exit price. This is particularly problematic in low-liquidity markets where large liquidation orders can cause a price impact that further degrades the value of the collateral being sold.

High slippage can lead to a shortfall in the amount recovered, potentially exhausting the insurance fund or leading to socialized losses. To mitigate this, protocols may use advanced execution strategies, such as splitting large orders or utilizing decentralized exchanges with deeper liquidity.

Minimizing slippage is essential for maintaining the solvency of the liquidation engine and ensuring that the protocol can effectively manage risk. It is a major challenge for platforms operating in volatile crypto markets.

Traders should be aware of how their platform manages slippage, as it directly impacts the risk of their positions being closed at unfavorable prices.