Liquidation
A liquidation is the forced closure of a leveraged position when a trader's margin can no longer cover its losses. Once price crosses the position's liquidation price, the exchange or lending protocol automatically sells or buys back the collateral to repay the borrowed funds, and the trader loses their remaining margin.
How it works
Leverage means borrowing against posted margin. Each position has a maintenance margin — the minimum equity it must keep — and a liquidation price at which equity would fall below it. Hit that price and the position is closed automatically. In DeFi lending, third-party liquidators repay the bad debt in exchange for the collateral at a discount, which is their incentive to keep the system solvent.
Why it matters
Liquidations are self-reinforcing. Forced long closures are market sells that push price lower, which triggers the next cluster of liquidations below — a cascade. These cascades produce the fast, outsized wicks common in crypto, and clustered leverage is the fuel. Liquidation heatmaps estimate where those clusters sit.
How to read it
Large liquidation prints often mark local exhaustion — the leverage on one side has been flushed. Pair the picture with funding and open interest: high open interest plus extreme funding means a lot of one-sided leverage is vulnerable, so a move into a liquidation cluster can accelerate.
Common misreads
A liquidation is not the same as your stop-loss — it happens at the exchange's liquidation price on the mark price, often worse than where you would have exited. Many venues use partial liquidations rather than closing the whole position at once, and insurance funds or auto-deleveraging absorb shortfalls when liquidations fill below the bankruptcy price.