How Do Decentralized Finance (DeFi) Lending Protocols Automate the Margin Call Process and What Are Its Systemic Risks? ▴ Learn

How Do Decentralized Finance (DeFi) Lending Protocols Automate the Margin Call Process and What Are Its Systemic Risks?

DeFi lending protocols automate margin calls through smart contracts. These contracts constantly monitor the collateralization ratio of loans.

If an asset's price drops and the ratio falls below a predetermined threshold, the smart contract automatically allows a third-party liquidator to repay part of the debt and claim a portion of the collateral at a discount. While efficient, this creates systemic risk.

During a flash crash, this can trigger a massive, simultaneous cascade of automated liquidations, overwhelming network capacity and causing extreme price slippage.

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