Forced Liquidation Value denotes the estimated price at which an asset, or a leveraged position in crypto, must be sold under duress due to unfulfilled margin call requirements or insufficient collateral. This value is characteristically lower than the asset’s fair market value, reflecting the urgency and market impact of the sale.
Mechanism
Automated systems continuously monitor the collateral ratio of leveraged positions against real-time market prices. If the collateral’s value declines below a predefined maintenance margin threshold, the system automatically initiates a forced sale of the underlying assets. This action covers the outstanding debt and prevents further losses for the lender or the exchange.
Methodology
Exchanges and lending platforms apply predetermined liquidation algorithms that account for current market depth, anticipated slippage, and a liquidation buffer to precisely determine the trigger and execution price. This systematic process minimizes credit risk for the platform and its participants, ensuring solvency even amidst rapid and volatile market downturns in cryptocurrency environments.
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