Liquidation

Liquidation is the forced closing of a leveraged position when your collateral no longer covers potential losses. Every leveraged trade has a liquidation price; if the market hits it, the exchange or DeFi protocol sells your position, and you lose most or all of the margin you put up, often plus a liquidation fee.

On centralised exchanges, liquidation engines close positions automatically. Insurance funds and, in extreme cases, auto-deleveraging of profitable traders cover any shortfall. In DeFi lending protocols such as Aave, if the value of your collateral falls too far relative to your loan, anyone can repay part of your debt and claim your collateral at a discount.

Large price moves can trigger cascading liquidations: forced selling pushes prices lower, which liquidates more positions. On 10 October 2025, the crypto market saw one of its largest liquidation events, with billions of dollars of leveraged positions wiped out within hours. Lower leverage and stop-losses reduce the risk.