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How Does the Liquidation Process Support the Stablecoin’s Peg?

Liquidation maintains over-collateralization by automatically selling collateral to cover debt, preventing bad debt and supporting the stablecoin's demand.
Greeks.Live16.11.25

How Does the Liquidation Process Support the Stablecoin’s Peg?

The liquidation process supports the peg by ensuring that the system remains over-collateralized. When a user's collateral value drops, the liquidation function automatically sells the collateral to cover the debt, often in the stablecoin itself.

This forced sale helps maintain demand for the stablecoin and prevents the creation of "bad debt" that could undermine the stablecoin's backing.

How Does a “Wrapped” Token Maintain Its Peg to the Original Asset?
How Does a Decentralized Stablecoin Maintain Its Dollar Peg?
What Is “Under-Collateralization” and What Is Its Consequence?
How Does the Redemption Mechanism Support a Stablecoin’s Peg during High Demand?

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