Liquidation
When a leveraged trading position or undercollateralized loan is forcibly closed by a protocol to prevent losses exceeding the deposited collateral. Liquidation typically happens automatically when the collateral value falls below a set threshold.
Why It Matters
Liquidation refers to the process of selling off assets to cover losses, especially when using borrowed funds. This concept is crucial for understanding risk management in crypto trading, especially in volatile markets.
Example
If you have borrowed funds to trade on margin and the value of your assets drops below a set level, the platform may automatically sell your assets to recover the loan. This can happen without any warning if the prices fall quickly.
Beginner Context
For beginners, knowing about liquidation highlights the risks of trading on margin. It’s an important lesson in financial safety and the importance of monitoring investments closely in volatile markets.
Mike Starr
Founder, CryptoWizardTools · M.S. Organizational Management
Last reviewed: August 2026
Related Terms
Initial DEX Offering
A token launch that takes place on a decentralized exchange rather than a centralized platform. IDOs give the public earlier access to new projects and allow for immediate open-market trading once launched.
Cross Chain
Refers to the ability of two or more separate blockchains to communicate and exchange data or assets with each other. Cross-chain bridges enable tokens to move between networks like Ethereum and Solana.
Bearish
A negative outlook on the price direction of a cryptocurrency or the broader market. A bearish investor expects prices to decline. The opposite of bullish.
Merkle Tree
A data structure used in blockchains where every transaction is hashed, and those hashes are combined into pairs and hashed again until a single root hash — the Merkle Root — is produced. This allows efficient and secure verification of any transaction in a block.
Sidechain
A separate blockchain that runs in parallel to a main blockchain and is connected to it by a two-way bridge. Sidechains can have their own consensus rules and are used to offload transactions and enable features not possible on the main chain.