Rules Based Liquidation

Definition ∞ Rules Based Liquidation refers to the automatic process of closing out a trader’s position when predefined conditions, such as a margin threshold being breached, are met. This mechanism is common in cryptocurrency derivatives exchanges and decentralized lending protocols to manage risk and prevent further losses for both the trader and the platform. The liquidation is executed programmatically according to established rules, without manual intervention. It helps maintain system solvency.
Context ∞ News reports frequently cover rules based liquidations during periods of high market volatility, explaining sudden price drops or cascading sell-offs. Understanding these automated processes is crucial for participants in leveraged trading and decentralized finance. Debates often focus on the fairness and efficiency of different liquidation engine designs and their impact on market stability during extreme events.