⚠️ RISKS & SECURITY
Liquidation Cascade
Definition
A liquidation cascade occurs when a series of liquidations trigger further price drops, which cause more positions to become undercollateralized, triggering yet more liquidations in a self-reinforcing downward spiral. This systemic risk is one of the most dangerous events in DeFi lending, often resulting in significant losses across the ecosystem.
Example
Example
During the May 2021 crash, ETH dropping 30% triggered massive Aave and Compound liquidations, which dumped more ETH on markets, pushing prices lower and liquidating even more positions.
Risks to Consider
Risks
- Systemic protocol failure
- Bad debt accumulation
- Oracle failures under stress
Common Questions
How can protocols prevent liquidation cascades?
Through conservative LTV ratios, gradual liquidation mechanisms (like Liquity's stability pool), circuit breakers, and diversified oracle sources. Users can protect themselves by maintaining high health factors.
