Comment by bombcar

As the other comment says, liquidation in tradfi has manual intervention - the loans will say things like "IF the collateral mark-to-market value drops below $X, the lender MAY call the loan and force sale of the collateral" - the key being the IF.

In a case where there's contagion [549] the banks or even the government can work to negotiate what's happening, and slow down the collapse (or even prevent it) - an example being the subprime mortgage backed securities which got to the point that nobody knew how to value them, so the government bought them all (and eventually actually "made" money by riding it out).

DEFI has algorithms that lock up the capital and will automatically liquidate it if certain parameters are met - which others can use to "attack" it - if the oracle sees bitcoin fall below $20k in a flash crash, it triggers the selling of ten thousand coins, say, which floods the price down further, you snap them up, the crash is over, you slowly sell at $25k or whatever. Bitcoin itself is pretty resistant to this, but the other coins, not so much, especially the side coins.

As a side note, most US home loans do NOT have a "call" clause and the bank can only initiate liquidation after you've missed payments and gone delinquent for a certain number of days; this was instituted in the US after calling mortgages contributed to the Great Depression. Some business loans can be called after a period of time for any reason (usually, interest rates have gone up).

[549]: https://en.wikipedia.org/wiki/Financial_contagion