How Does a Centralized Exchange (CEX) Manage the Liquidation Process for Illiquid Altcoin Futures?

A CEX manages liquidation for illiquid futures with caution to prevent market destabilization. They typically use a stepped liquidation process, where positions are reduced gradually rather than closed all at once.

An insurance fund is often used to cover any losses that exceed the margin. For extremely illiquid assets, the exchange may take over the position and liquidate it via an Over-The-Counter (OTC) desk or use a 'socialized loss' mechanism if the insurance fund is depleted.