What Is a 'Liquidation Cascade' and How Can It Be Front-Run? ⎊ Path

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.

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How Does a Commit-Reveal Scheme Protect a Trade from Being Front-Run?

How Do Automated Liquidation Bots Contribute to the Speed of a Cascade?

How Does ‘Slippage’ Affect a Margin Call Triggered by an Oracle?

How Does the Leverage Ratio in Derivatives Trading Determine the Trigger Point for a Liquidation Cascade?

How Does the Concept of ‘Run Risk’ on a Stablecoin Relate to Margin Requirements in Derivatives Trading?

Glossar

Liquidation Cascade

Trigger ⎊ A liquidation cascade, within cryptocurrency and derivatives markets, initiates when an asset’s price declines sufficiently to trigger margin calls for leveraged positions.

Pending Liquidation Transactions

Liquidation ⎊ The process of converting collateral assets into cash to cover margin deficits in leveraged trading accounts, prevalent across cryptocurrency derivatives, options, and traditional financial derivatives.