How it works
Every leveraged position has a liquidation price. If the market reaches it, the position is closed and the margin is mostly or fully lost. In DeFi lending, collateral is sold when its value falls below a set ratio of the loan.
Liquidation cascades
When many traders bet the same way, a price move liquidates the first group, whose forced orders push the price further and liquidate the next. Such cascades cause sharp wicks and record liquidation days.