Definition ∞ Liquidation risk denotes the possibility that an asset or position will be sold at a substantial loss due to insufficient market depth or rapid price declines. This is particularly relevant in leveraged trading environments or decentralized finance (DeFi) protocols where collateralized loans can be automatically terminated if the value of the collateral falls below a predetermined threshold. Managing liquidation risk is critical for preserving capital and maintaining the stability of financial systems that rely on collateralized debt. The abrupt sale of assets can further depress prices, creating a feedback loop.
Context ∞ Liquidation risk is a prominent concern during periods of high market volatility in the cryptocurrency sector, often driving significant price corrections. News reports frequently detail the scale of liquidations occurring across DeFi protocols or leveraged trading platforms, particularly following sharp downturns in major digital asset prices. Understanding the triggers and consequences of liquidations is essential for assessing systemic risk within the crypto market and for individual traders managing their positions.
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