Liquidation Process

Definition ∞ A liquidation process is the mechanism by which an asset or collateral is sold to satisfy outstanding debts or margin calls, typically within financial markets. In leveraged trading or decentralized finance protocols, this occurs when a position’s value falls below a predetermined threshold, forcing the sale of assets to cover potential losses. The efficiency and fairness of this process are critical for market stability.
Context ∞ The liquidation process is a frequently discussed topic in cryptocurrency markets, particularly during periods of high volatility, as it can exacerbate price declines. Debates often focus on the design of liquidation engines in decentralized lending protocols, the impact of slippage on the price received by liquidators, and the potential for market manipulation. Analysts are scrutinizing the resilience of these mechanisms under extreme market stress and the effectiveness of safeguards designed to prevent cascading liquidations.