Liquidation

On exchanges, every leveraged position has a liquidation price. If the market reaches it, the exchange's risk engine closes the position and the trader loses most or all of the margin. Long liquidations happen when prices fall; short liquidations happen when prices rise.

In DeFi, lending protocols such as Aave and MakerDAO, now Sky, apply the same logic to loans. Borrowers must keep collateral above a set ratio, and if its value falls, often measured by price oracles, third parties can repay part of the debt and claim the collateral at a discount.

Liquidations can feed on themselves. Forced selling pushes prices further, which triggers more liquidations, a pattern called a liquidation cascade. Data sites publish daily liquidation totals, and large spikes usually coincide with the market's sharpest moves.