What Is the Role of Collateral in Crypto Derivatives and How Does Its Liquidation Trigger Front-Running?

Collateral is the asset a trader deposits to secure a leveraged derivatives position. If the value of the collateral falls below a maintenance margin level, the position is automatically liquidated, meaning the underlying assets are sold to cover the debt.

This forced sale is often a large, market-moving transaction that is visible in the mempool. Front-running bots target these visible liquidation transactions to buy the assets cheaply just before the sale and sell them immediately after the price recovers, profiting from the forced price impact.