Definition ∞ Arbitrage involves profiting from price differences of the same asset across various markets. Liquidation occurs when a borrower’s collateral in a decentralized finance loan falls below a predetermined threshold, triggering an automatic sale to repay the debt. These two processes are fundamental to maintaining market efficiency and protocol solvency in digital asset ecosystems. They are often executed by automated bots seeking profit opportunities or risk mitigation.
Context ∞ The interplay of arbitrage and liquidation is a constant feature in cryptocurrency markets, especially within lending and borrowing protocols. Market volatility frequently leads to increased liquidation events, which in turn create arbitrage opportunities for alert participants. Regulatory scrutiny often addresses the systemic risks associated with rapid, large-scale liquidations and the potential for market manipulation through arbitrage strategies.
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