Liquidators
Understanding the role of liquidators in maintaining protocol stability
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Understanding the role of liquidators in maintaining protocol stability
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In the Secured Finance ecosystem, Liquidators play a crucial role in maintaining the health and stability of the decentralized loan protocol. As a Liquidator, you have the unique opportunity to participate in the liquidation process, ensuring the safety of lenders' funds while potentially earning rewards for your efforts.
When a borrower's collateral value falls below the liquidation threshold, their loan becomes susceptible to liquidation. As a Liquidator, your role is to step in and purchase the undercollateralized loan at a discounted price, providing the borrower with an opportunity to recover their position. By liquidating the loan, you allow lenders to recoup their funds and mitigate the risk of defaults.
To become a Liquidator, you don't need to meet any specific criteria. Any user, even if using smart contracts, can call the liquidation process.
For more technical details, please consult ''.
Liquidation Threshold
The LTV ratio at which a position becomes eligible for liquidation
80%
Liquidation Penalty
The discount applied to collateral during liquidation
5%
Minimum Liquidation Size
The smallest position that can be liquidated
None
Liquidation Cooldown
Time required between liquidations of the same position
None
A liquidator monitors the protocol for undercollateralized positions:
The liquidator identifies a borrower with an LTV ratio of 82% (above the 80% threshold)
The borrower has 10,000 USDC collateral and 8,200 USDC worth of debt
The liquidator calls the liquidation function, specifying the borrower's address
The protocol automatically liquidates 50% of the position (4,100 USDC worth of debt)
The liquidator pays 4,100 USDC to cover this debt
The liquidator receives 4,305 USDC worth of collateral (4,100 × 1.05)
The liquidator earns a profit of 205 USDC (5% liquidation fee)
Anyone can become a liquidator in the Fixed-Rate Lending Protocol. There are no special requirements or permissions needed. Both individuals and smart contracts can participate in the liquidation process.
Liquidators profit from the liquidation penalty (currently 5%) applied to the liquidated debt. When you liquidate a position, you pay the debt amount but receive collateral worth more than what you paid. The difference is your profit.
To be an effective liquidator, you typically need:
A monitoring system to track positions close to liquidation threshold
Sufficient capital to cover the debt you're liquidating
Automation tools or bots to execute liquidations quickly
Gas price monitoring to ensure liquidations remain profitable
Yes, there are several risks:
Price Volatility: Rapid price changes can affect the value of the collateral you receive
Gas Costs: High gas prices can reduce or eliminate profitability
Competition: Other liquidators may compete for the same liquidation opportunities
Smart Contract Risk: As with any DeFi activity, there's always some level of smart contract risk
Speed is crucial in liquidations. Once a position crosses the liquidation threshold, it becomes a race among liquidators to execute the transaction first. Positions are typically liquidated within seconds or minutes of becoming eligible, depending on market conditions and visibility of the position.
Being a Liquidator comes with both risks and rewards. The main risk is the potential price volatility of the assets involved in the liquidation process. The value of the collateral may fluctuate rapidly, affecting the profitability of the liquidation.
On the other hand, the rewards for successful liquidations can be lucrative. Liquidators stand to receive a portion of the discounted collateral acquired during the liquidation. This reward serves as an incentive for participants to actively engage in the liquidation process and contribute to the protocol's stability.