The permissionless closing of an undercollateralised loan, where anyone may repay part of the debt and claim collateral at a discount.
No margin desk calls you. Bots monitor every position continuously, and the instant a health-factor crosses 1.0 they compete to submit the liquidation transaction and collect the liquidation-bonus. Reaction time is a block, not a business day.
The mechanics are harsher than a centralised margin call in one respect and gentler in another: there is no grace period at all, but many protocols liquidate only a portion of the debt, restoring health rather than closing the whole position. You keep the remainder, minus the discount you just paid.
Cascades are the systemic version. Liquidations sell collateral into a falling market, pushing prices down and triggering more, which is why crashes accelerate. See liquidation-cascade, and note that when liquidators cannot execute profitably the protocol is left with bad-debt.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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