Forced sale of collateral in a CDP when the position becomes undercollateralized.
A liquidation happens when a crypto-backed stablecoin position (CDP) falls below its safe collateral ratio. The protocol allows liquidators — often bots — to seize and sell the collateral, using the proceeds to repay the outstanding stablecoin debt plus a liquidation penalty. Liquidations protect the peg by ensuring that undercollateralized supply is always redeemed against real collateral. They also create keeper economies of specialists competing to liquidate profitable positions.