Description: Involuntary liquidation occurs when a user’s collateral is automatically sold by a DeFi protocol due to insufficient funds to cover a loan or obligation. This mechanism is fundamental in the decentralized finance (DeFi) ecosystem, as it ensures that loans remain solvent and that lenders do not take on excessive risks. When a user takes out a loan in a DeFi protocol, they typically must provide collateral in the form of cryptocurrencies. If the value of this collateral falls below a specific threshold, the protocol triggers involuntary liquidation to recover the borrowed funds. This process is carried out without human intervention, using smart contracts that automatically execute the sale of the collateral on a decentralized exchange. Involuntary liquidation serves as a protective mechanism for both lenders and the stability of the system, as it helps prevent loan defaults and maintains market integrity. However, it can also pose a risk to borrowers, who may lose their collateral during times of market volatility. Therefore, it is crucial for users to manage their collateral properly and stay alert to market fluctuations to avoid unwanted liquidations.
