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How Does Illiquidity Exacerbate the Speed of a Death Spiral in DeFi Protocols?

Few buyers in illiquid DeFi markets cause small sales to create large price drops, triggering rapid, cascading liquidations.
Greeks.Live20.11.25

How Does Illiquidity Exacerbate the Speed of a Death Spiral in DeFi Protocols?

Illiquidity means there are few buyers for a large volume of sellers. In a DeFi death spiral, as panic selling begins, the lack of depth in the decentralized exchange (DEX) order books means small sales cause disproportionately large price drops.

This rapidly deteriorating price feeds back into the protocol's collateral value, triggering more liquidations and further accelerating the spiral.

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