Debt Liquidation

Definition ∞ Debt liquidation involves the forced sale of collateralized assets to cover outstanding debt obligations. This process typically occurs when the value of the collateral falls below a predetermined threshold. Lenders initiate liquidation to recover their loaned capital, especially when borrowers cannot meet margin calls or loan repayments.
Context ∞ In decentralized finance (DeFi), debt liquidation is an automated process executed by smart contracts when collateral ratios drop below specific parameters. This mechanism helps maintain the solvency of lending protocols but can trigger significant market selling pressure during periods of high volatility. Understanding debt liquidation is crucial for analyzing market downturns and the stability of DeFi platforms.