How Can Oracle Failure Lead to Cascading Liquidations in a Derivatives Exchange?

If an oracle fails or provides a drastically incorrect, usually lower, price feed for the underlying asset, the smart contract on the derivatives exchange will incorrectly assess the collateral ratios of many leveraged positions. This erroneous price drop can trigger a massive wave of automated liquidations (cascading liquidations) across the platform, even if the true market price has not moved significantly, causing systemic risk and panic.