Liquidation

Liquidation is the automatic, forced closure of a leveraged or collateral-backed crypto position when the value of the collateral falls too close to, or below, the value of what's been borrowed against it.

Borrowing or trading with leverage means putting up collateral worth more than the position you're opening, with a maintenance threshold defining the minimum ratio between the two. If the market moves against the position and the collateral's value drops toward that threshold, the platform steps in — automatically, without waiting for the trader to act — and closes some or all of the position to repay what's owed before the collateral becomes insufficient to cover it. This protects the lender or protocol from taking on a loss, but for the trader it usually means losing the collateral at close to the worst possible moment, often with an additional liquidation penalty on top.

This matters even for people who never intend to use leverage directly, because clusters of liquidations can accelerate a price move: a sharp drop triggers liquidations, which forces selling, which pushes the price down further and triggers more liquidations. Large liquidation events are one of the more dramatic features of volatile crypto markets, and they're a useful signal of how much leveraged positioning currently exists in a market, not just a description of what happens to individual over-leveraged traders.

Zest's liquidation price calculator, at /tools/liquidation, lets you work out where your liquidation threshold sits for a given collateral ratio and entry price, which is worth checking before opening any leveraged position rather than after the market has already moved.

Liquidation risk connects to a few other concepts worth understanding together: a depeg in a stablecoin used as collateral can trigger liquidations that have nothing to do with the trader's own position sizing, since the collateral itself lost value. And market-wide sentiment, as tracked by tools like the Fear & Greed Index, tends to run toward extremes right around major liquidation events, since both are downstream of the same crowded, leveraged positioning. For traders who'd rather avoid liquidation risk altogether, building a position gradually through dollar-cost averaging with no leverage sidesteps the mechanism entirely — there's no threshold to breach if there's no borrowed collateral in the first place.