How Does a ‘Liquidity Pool’ Protect against Cascading Liquidations?

A liquidity pool, in the context of a decentralized exchange, acts as the counterparty for liquidation trades. When a leveraged position is liquidated, the assets are sold into the pool.

The pool provides immediate, deep liquidity, ensuring the liquidation trade can be executed with minimal slippage and price impact. This prevents the liquidation itself from causing a sharp, downward price spiral that could trigger a cascade of further liquidations.