DeFi & governance
Leverage and liquidation
A position can be closed by the system before the trader's long-term view has time to play out.
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Leverage magnifies exposure relative to the capital supporting it. In collateralised systems, changes in collateral value, debt or risk parameters can push a position toward liquidation. Aave's documentation, for example, describes health factor and liquidation conditions. Other protocols and derivatives venues use their own rules.
Model the path, not only the destination
A trader may correctly predict a later recovery and still lose the position during an earlier decline. Funding, fees, changing collateral requirements and limited liquidity can add pressure. The relevant question is whether the position survives the path taken by the market.
Do not transfer a liquidation formula from one platform to another without checking its definitions. Establish which price triggers action, which assets can be sold and whether the interface's displayed price matches the liquidation reference.
For research, record the protocol version and parameters at the time of the event. A loss caused by a disclosed liquidation rule is different from a theft or an incorrect price input. See oracles and contagion.
Sources
Research checked 5 September 2026. Historical cases retain the date and legal status of the cited record.