Explain the Role of Liquidation in Maintaining a Stablecoin’s Peg

Liquidation is an automated process triggered when the value of the collateral backing a stablecoin loan falls below a predefined threshold, threatening the peg. The smart contract automatically sells the collateral on the open market to repay the stablecoin debt.

This mechanism ensures that the stablecoin supply remains fully backed and prevents the issuance of under-collateralized stablecoins, thus stabilizing the system.