When you trade with leverage on a crypto exchange or DeFi protocol, you’re betting more than you own. That’s where the liquidation engine, a automated system that closes risky positions to prevent losses from spreading. It’s not a feature—it’s a safety net built into every platform that lets you borrow. Without it, one bad trade could wipe out an entire lending pool, and no one would lend crypto anymore.
The liquidation engine, a automated system that closes risky positions to prevent losses from spreading. It’s not a feature—it’s a safety net built into every platform that lets you borrow. works by tracking your collateral, crypto assets locked up to secure a loan against your borrowed amount. If the price of your collateral drops too far, the system triggers a sale—no warning, no mercy. This isn’t just about losing your position; it’s about protecting everyone else using the same protocol. Platforms like Aave, Compound, and even centralized exchanges like Binance rely on this same logic, just with different thresholds.
What most traders miss is that the liquidation price, the exact price at which your position gets automatically closed isn’t fixed. It changes with market volatility, fees, and how much you’ve borrowed. A 70% collateral ratio might sound safe, but if Bitcoin drops 20% in an hour, you’re already in danger. That’s why smart traders use stop-losses, avoid over-leveraging, and always keep extra cash on hand—not just in the same token they’re trading.
And it’s not just about Bitcoin or Ethereum. On DeFi, you can borrow stablecoins against NFTs, meme coins, or even tokenized real-world assets. Each of these has its own risk profile, and each platform’s liquidation engine, a automated system that closes risky positions to prevent losses from spreading handles them differently. Some use price oracles from multiple sources to avoid manipulation. Others add buffer zones or grace periods. But none of them will wait for you to react.
If you’ve ever seen a trade vanish in seconds with no explanation, that’s the liquidation engine doing its job. It doesn’t care if you’re a beginner or a pro. It doesn’t care if you’re holding for the long term. It only cares about numbers: collateral value, debt level, and market price. The best way to avoid being liquidated isn’t to guess the market—it’s to understand the system you’re playing in. Below, you’ll find real examples of how this plays out on different platforms, what went wrong for traders, and how to build safer strategies around it.
Liquidation engines automatically close leveraged crypto positions when collateral drops too low. Learn how they work on centralized exchanges vs. DeFi, why ADL happens, and how to avoid getting wiped out.
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