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How Does Liquidation Occur in a CDP and What Is Its Purpose?

Liquidation is the automatic sale of under-collateralized assets to repay debt, maintaining system solvency and protecting the synthetic asset's peg.
Greeks.Live16.11.25

How Does Liquidation Occur in a CDP and What Is Its Purpose?

Liquidation occurs when the collateralization ratio of a CDP falls below the minimum threshold set by the smart contract, typically due to a drop in the collateral's market price. The smart contract automatically allows liquidators to buy the under-collateralized collateral at a discount to repay the outstanding debt.

The purpose is to maintain the solvency of the system and protect the peg of the synthetic asset. By forcing the repayment of debt, the system ensures that the total value of collateral always exceeds the total debt.

How Does the Redemption Mechanism Support a Stablecoin’s Peg during High Demand?
Explain the Role of a Collateralized Debt Position (CDP) in Creating Synthetic Derivatives
What Is the Difference between a ‘Soft Liquidation’ and a ‘Hard Liquidation’?
What Happens If the Collateralization Ratio Falls below a Minimum Threshold?

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