Collateralized NFTs are liquidated when the borrower fails to pay back the loan on time.
The first person to pay the "Buy It Now" price immediately wins the Auction.
If no-one pays the "Buy It Now" price, the Liquidation Auction ends after 24 hours, and the highest bid at the time the auction ends is the one that will be accepted by the protocol.
If no bid was placed during the 24 hour Liquidation Auction period, the collateral will be transferred to the first Lender in the Lending Queue, as the liquidity they provided acts as a bid by default.
To place a Bid, participants have to transfer ETH to the Auction contract, which then allocates the funds down the lending queue, settling the debt of the other Lenders.
This auction means that earlier Lenders are more likely to have their debt settled after making loans.
Collateral devaluation will primarily affect Lenders participating at higher valuations, as they can only be repaid by auction participants.