It also means the price will fall ten bucks in ten seconds

(https://autoadmit.com/thread.php?thread_id=4137864&forum_id=7#37268132)

https://medium.com/makerdao/dai-cdp-user-stories-36735f095fda

(https://autoadmit.com/thread.php?thread_id=4137864&forum_id=7#37268267)

Automatic Liquidations of risky CDPs

To ensure there is always enough collateral in the system to cover the value of all outstanding Debt (according to the Target Price), a CDP can be liquidated if it is deemed to be too risky. The Maker Platform determines when to liquidate a CDP by comparing the Liquidation Ratio with the current collateral-to-debt ratio of the CDP.

Each CDP type has its own unique Liquidation Ratio that is controlled by MKR voters and established based on the risk profile of the particular collateral asset of that CDP type.

Liquidation occurs when a CDP hits its Liquidation Ratio. The Maker Platform will automatically buy the collateral of the CDP and subsequently sell it off. There is a temporary mechanism in place for Single-Collateral Dai called a Liquidity Providing Contract. For Multi-Collateral Dai an auction mechanism will be used.

Liquidity Providing Contract (Temporary mechanism for Single-Collateral Dai)

During Single-Collateral Dai, the mechanism for liquidation is a Liquidity Providing Contract: a smart contract that trades directly with ethereum users and keepers according to the price feed of the system.

When a CDP is liquidated, it is immediately acquired by the system. The CDP owner receives the value of the leftover collateral minus the debt, Stability Fee and Liquidation Penalty.

The PETH collateral is set for sale in the Liquidity Providing Contract, and keepers can atomically purchase the PETH by paying Dai. All Dai paid this way are immediately removed from the Dai supply, until an amount equal to the CDP debt has been removed. If any Dai is paid in excess of the debt shortfall, the excess Dai is used to purchase PETH from the market and burn it, which positively changes the ETH to PETH ratio. This results in a net value gain for PETH holders.

If the PETH selloff initially does not raise enough Dai to cover the entire debt shortfall, more PETH is continuously created and sold off. New PETH created this way negatively changes the ETH to PETH ratio, causing PETH holders to lose value.

Debt and Collateral Auctions (Multi-Collateral Dai)

During a liquidation, the Maker platform buys the collateral of a CDP and subsequently sells it in an automatic auction. This auction mechanism enables the system to settle CDPs even when price information is unavailable.

In order to take over the collateral of the CDP so that it can be sold, the system first needs to raise enough Dai to cover the CDP’s debt. This is called a Debt Auction, and works by diluting the supply of the MKR token and selling it to bidders in an auction format.

In parallel, the collateral of the CDP is sold in a Collateral Auction where all proceeds (also denominated in Dai) up to the CDP debt amount plus a Liquidation Penalty (A Risk Parameter determined by MKR voting) is used to buy MKR and remove it from the supply.

This directly counteracts the MKR dilution that happened during the Debt Auction. If enough Dai is bid to fully cover the CDP debt plus the Liquidation Penalty, the Collateral Auction switches to a reverse auction mechanism and tries to sell as little collateral as possible--any leftover collateral is returned to the original owner of the CDP.

https://makerdao.com/whitepaper/

(https://autoadmit.com/thread.php?thread_id=4137864&forum_id=7#37268305)