Leverage Cleanup

Definition ∞ Leverage cleanup refers to the process of reducing excessive borrowed funds or debt within a financial system or market. In cryptocurrency markets, this often occurs during periods of significant price volatility, where highly leveraged positions are liquidated, leading to a cascade of forced selling. This deleveraging process helps to remove systemic risk by reducing the overall indebtedness and speculative exposure of participants. While often painful in the short term, it can lead to a healthier, more stable market environment.
Context ∞ Discussions about leverage cleanup frequently arise during or after major market downturns in the digital asset space. The situation often involves analyzing funding rates, open interest, and liquidation volumes on centralized exchanges and decentralized lending protocols. A critical future development involves improved risk management tools and more transparent reporting of leverage metrics to prevent extreme market instability.