Liquidation is the forced closure of a leveraged position when collateral is insufficient to cover losses, protecting the exchange or lenders.
When equity falls below maintenance margin, risk engines automatically close positions. Some venues use insurance funds or auto-deleveraging to handle residual losses.
"A sharp drop can liquidate long positions as prices hit stop-out levels, causing further sell pressure."
"Auto-deleveraging may assign positions to opposing traders if the insurance fund is depleted."
Mitigation includes conservative leverage, timely margin adds, hedging, and using stop orders. Protocols can add circuit breakers and dynamic margins during volatility.
"Reducing leverage ahead of major events lowers liquidation risk from sudden gaps."
"Perpetual swaps adjust maintenance margins during high volatility to stabilize markets."
All terms and definitions may update as the Cryptionary improves.