What Is a ‘Liquidation Cascade’ and How Can It Be Front-Run?

A liquidation cascade occurs when a rapid drop in the price of a leveraged asset triggers a large volume of forced liquidations across a derivatives exchange. Each liquidation involves the forced sale of the underlying collateral, which further pushes the price down, triggering more liquidations in a cascading effect.

This is a highly predictable event. It can be front-run by bots that monitor the mempool for pending liquidation transactions or the price oracle for a price update that will trigger a liquidation.

The bot executes a profitable trade just before the forced sale or price update, capitalizing on the guaranteed price movement.