Do Decentralized Exchanges (DEXs) Handle Liquidations Differently than Centralized Exchanges (CEXs)?
Yes, the process is fundamentally different. On a CEX, the exchange itself acts as the liquidator, taking over and closing the position, often using an internal insurance fund.
On a DEX, the liquidation process is decentralized and permissionless. It is governed by a smart contract that allows any third-party user (a "liquidator bot") to identify an undercollateralized position, repay the debt on behalf of the borrower, and claim the collateral at a discount as a reward.
The process is more transparent but can be more chaotic and prone to issues like network congestion.
Glossar
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Liquidations
Trigger ⎊ Liquidations represent the forced closure of leveraged positions due to insufficient margin to cover adverse price movements, a critical event in cryptocurrency, options, and derivatives markets.
Centralized Exchanges
Exchange ⎊ Centralized exchanges (CEXs) represent a critical infrastructure within cryptocurrency markets, facilitating order matching and settlement for a diverse range of digital assets, including options and derivatives.