Collateral liquidation occurs in decentralized finance lending protocols when the value of a borrower’s collateral falls below a predetermined threshold, often due to market price fluctuations. To protect the lender, the protocol automatically sells a portion of the collateral to repay the loan and maintain solvency. This automated process is a core risk management mechanism in many DeFi applications. It ensures the stability of lending platforms by managing loan-to-value ratios.
Context
Collateral liquidation events are a recurring feature in DeFi news, especially during periods of high market volatility, as they can trigger cascading price movements. Discussions often center on the efficiency of liquidation mechanisms, gas fees impacting liquidators, and the potential for market instability during large-scale liquidations. Understanding these events is essential for assessing risk in decentralized lending markets.
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