🌊What is a Liquidation Cascade? + Why Should You Care?

A liquidation cascade occurs when liquidations lead to falling prices and thus trigger more liquidations. Smaller price movements become larger as forced sales (aka liquidations) trigger further liquidations for positions whose cost basis is close to that of the previous position. This can cause a drastic fall in token prices, which then leads to more liquidations.

One of the most recent catalysts of a cascade was the collapse of Terra and its algorithmic stablecoin UST in May 2022.

Liquidations cascade can cost you money, even your entire position in a protocol in a worst case. Good DeFi = Safe DeFi.