Crypto's Silent Killer: How Liquidation Keeps Leverage Solvent

Liquidation in crypto is an automated process that keeps leveraged systems solvent without relying on identity, courts, or credit scores. There are two main types of liquidations: exchange liquidations, which force-close leveraged trades when losses approach the margin, and DeFi lending liquidations, where overcollateralized loans are enforced by an open market of bots called keepers.

The health factor is a key concept in DeFi lending, representing the value of collateral weighted by its liquidation thresholds divided by debt. A health factor above 1 indicates a safe position, while below 1 means anyone can liquidate the borrower. Liquidators earn a bonus for repaying unhealthy borrowers' debts and selling their collateral.

Exchange liquidations occur when a trader's losses erode their margin to the venue's maintenance threshold, triggering a force-close of the position. This process is designed to keep lenders solvent without relying on trust or credit scores. In DeFi lending, liquidation cascades can happen when forced selling pushes prices lower and triggers the next layer of leveraged positions.

On a single day in 2025, roughly $410 million of leveraged crypto positions were liquidated, with most being longs. The number of liquidations has reached over $1 billion in some days, and more than $150 billion across the year.