A liquidation cascade is a sequence of forced selling events that can occur in leveraged trading environments, particularly within decentralized finance (DeFi) protocols. When the value of collateral assets falls below a certain threshold, automated liquidation processes are triggered, selling the collateral to repay debt. If this selling pressure drives asset prices down further, it can trigger more liquidations, creating a self-reinforcing downward spiral. This phenomenon can lead to rapid and substantial price declines and significant market instability.
Context
Liquidation cascades are a critical subject of analysis during periods of high market volatility, especially concerning leveraged positions in decentralized lending and derivatives protocols. News reports often detail how these cascades can exacerbate price downturns, leading to substantial losses for investors and stress on DeFi platforms. Understanding the mechanisms and triggers of liquidation cascades is vital for assessing systemic risk within the digital asset market.
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