What Is the Relationship between Liquidation and Systemic Risk?

Liquidation mechanisms are designed to mitigate systemic risk by ensuring that individual under-collateralized positions do not threaten the entire stablecoin system's solvency. However, in extreme market crashes, mass liquidations can flood the market with collateral assets, driving their price down further and triggering more liquidations, potentially leading to a 'liquidation cascade' that increases systemic risk.