What Is “Liquidity Black Hole” and How Does It Relate to DeFi Stablecoin Failure?

A liquidity black hole occurs when a protocol, often a lending platform, has a large, illiquid asset as collateral. When a stablecoin fails, the protocol must liquidate this collateral to cover bad debt.

However, the market lacks the depth to absorb the large sale volume, causing the collateral's price to plummet. This rapid price drop creates a loop: lower collateral price means more liquidations are needed, but each liquidation further destroys the price, creating a self-reinforcing, inescapable liquidity vacuum.