A liquidation contract is a self-executing agreement within a decentralized finance lending protocol, programmed to automatically sell collateral when a borrower’s debt-to-asset ratio surpasses a specified limit. This automated function maintains the financial health of the lending pool by converting deposited assets to cover outstanding loan obligations. It operates as a fundamental risk control instrument in overcollateralized DeFi environments. This ensures protocol solvency without human intervention.
Context
Liquidation contracts are a frequent subject in cryptocurrency news related to DeFi market dynamics, especially amidst significant price swings. Reports often assess the operational efficacy and impartiality of these automated procedures, particularly during widespread collateral sales. The configuration and thresholds of these contracts are paramount for safeguarding the integrity and dependable function of decentralized credit platforms.
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