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README.md
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aave.md
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compound.md
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euler.md
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liquity.md
liquity.md
 
 

README.md

liquidation


tl, dr


  • lending protocol work by requiring users to deposit some collateral. users can then borrow different assets and tokens from others depending on what they need, up to a certain amount of their deposited collateral. as the value of a borrower's collateral fluctuates, if the value of the borrowed assets exceeds the value of the collateral, the protocol allows anyone to liquidate the collateral (similar to margin calls in traditional finance).
  • liquidation happens when a user buys someone's collateral (at a discount) when the value of borrowed asset exceeds a predetermined value relative to the asset deposited as collateral.
  • searchers compete to parse blockchain data as fast as possible to determine which borrowers can be liquidated and be the first to submit a liquidation transaction and collect the liquidation fee.
  • example of strategy: bot detects a liquidation opportunity at a block and issues a liquidation tx, which is expected to be included in the next block. to compete with other liquidators, the bot sets high tx fees for their liquidation tx.
  • another strategy: bot observes a tx that will create a liquidation opportunity (e.g., an oracle price update tx rendering a collateralized debit to be liquidated), then backruns this tx with a liquidation tx to avoid the fee bidding competition.

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