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Can dynamic margin calls mitigate leverage over-extension? Dynamic margin calls, which trigger at progressively higher thresholds as volatility increases, can theoretically mitigate over-extension by forcing deleveraging earlier in a downturn. Instead of a single, hard liquidation threshold, a system could require partial position unwinding when collateral drops by 10%, then 15%, and so on. This creates a "soft" landing by distributing selling pressure over time, preventing a sudden, catastrophic liquidity crunch. However, this approach has trade-offs. It increases operational complexity for borrowers and could lead to a slower, but still inevitable, death spiral if the underlying market trend is strongly negative. While it can smooth the unwind process, it cannot eliminate the fundamental risk of excessive leverage; it only manages the mode of failure.

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