Cascading liquidations describe a chain reaction where the forced sale of collateral in one position triggers margin calls or liquidations in other positions. This phenomenon typically occurs in highly volatile markets, particularly within leveraged trading or decentralized finance lending protocols. As assets are sold to cover debts, their price drops further, accelerating more liquidations. This creates a feedback loop that can severely impact market stability.
Context
News reports on significant cryptocurrency market downturns often cite cascading liquidations as a primary driver of rapid price declines. Understanding this concept is essential for comprehending market volatility and the systemic risks within leveraged digital asset ecosystems. Analysts frequently discuss the potential for such events when evaluating the health and stability of DeFi platforms. These occurrences can have broad implications for investor confidence and market structure.
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