Liquidation is when a trader or asset lender forces the forced closing out of all or a portion of the initial margin position, as reported by Cryptoslate.
When a trader lacks the cash to maintain the transaction and is unable to meet the allocation of a leveraged position, liquidation happens.
A leveraged position is when you borrow money or use your existing assets as collateral for a loan, and then you combine the borrowed funds with the principal to buy financial items to increase your profit.
Most loan protocols contain a liquidation feature, including Aave, MakerDAO, and Abracadabra.
On June 18, when the price of ETH dropped, there were 13 liquidation occurrences in the decentralised finance (DeFi) market, according to data from footprint analytics. Lending procedures liquidated 10,208 ETH on the same day for a $424 million total liquidation, noted Cryptoslate.
Liquidators follow liquidations. The assets that are being liquidated may be purchased by big institutions or investors at a discount and then sold to make up the shortfall.
Stake lending in DeFi refers to the practise of users pledging their assets to the lending protocol in exchange for the target asset and then investing once again to increase their earnings. In essence, it is a derivative. The loan protocol will create a liquidation mechanism to lower the risk for the protocol in order to ensure the long-term stability of the system.
The staked assets will be liquidated when the value of the assets staked by users in the platform falls below the liquidation line and the price of the currency declines (the procedure for setting up liquidation will differ from platform to platform). Users will, of course, immediately liquidate riskier assets to prevent liquidation during a slump. DeFi’s TVL, which has fallen 57% over the last 90 days, is also impacted by this.
(With insights from Cryptoslate)