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Cooling DownSnapshot Window: 2026-07-10 11:40 UTC · ← Back to Crypto Overview
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Liquidations in DeFi explained Hey everyone, Joshua from Peridot again. Last post I wrote about where yield comes from. This one's about the word that scares people away from ever borrowing in DeFi: liquidation. It's the most misunderstood mechanism in lending, so let me explain it. First, why it exists at all. When you borrow in DeFi, there's no credit score and no debt collector. The only thing guaranteeing your loan is the collateral you deposited and the moving crypto prices it is associated with. So every lending protocol has one job above all others: make sure loans stay backed by more value than they're worth. When a loan drifts too close to being underwater, the protocol lets someone step in, pay off the debt, and take collateral in return.