Liquidation vulnerability describes the risk that a collateralized position in decentralized finance may be forcibly closed. This occurs when the value of a borrower’s collateral falls below a predetermined threshold, triggering an automated sale of assets to repay the outstanding debt. It is a critical risk factor in lending protocols and margin trading platforms, particularly during periods of high market volatility. Understanding this risk is essential for participants engaging with leveraged digital asset positions.
Context
Current discussions surrounding liquidation vulnerability often focus on optimizing collateral ratios and improving oracle reliability to prevent cascading liquidations during market downturns. The frequency of liquidations provides a key indicator of market stress within DeFi ecosystems. Protocols continually adjust their risk parameters to mitigate systemic risks associated with sudden price movements.
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