The liquidation process occurs when a Trader incorrectly anticipates market behavior and the price of the purchased asset drops for long positions or goes above the liquidation price for short positions. In this situation, the position is closed when it becomes too risky, and the Trader's deposit can't cover the losses. To prevent losses for the protocol and Lenders, liquidation is carried out slightly earlier when the ratio between the value of the position asset and position debt reaches a critical level. Any further price fluctuations could cause losses for the protocol. The size of the buffer varies based on the volatility of the particular pair.

Liquidation is performed by Keepers.

For a deep dive into the Liquidation mechanism, please refer to sections 4.2.3 and 6 of the Yellow Paper.