𧾠Thread: Why Liquidation Design Matters in DeFi
Black Thursday 2020: MakerDAO's DAI depegged to $0.89 as liquidations failed during network congestion. $8.32M in bad debt emerged.
This catastrophe highlighted why efficient liquidation mechanisms are CRITICAL. 1/8
The Problem: Traditional liquidation systems rely on external liquidators who must:
⢠Monitor positions 24/7
⢠Pay gas fees during congestion
⢠Compete in auctions
⢠Risk MEV attacks
Result? Liquidations fail when you need them most. 2/8
Aave v3's Solution: Dutch Auction Liquidations
⢠Bonus starts high, decreases over time
⢠Incentivizes quick liquidations
⢠Reduces gas wars
⢠Better price discovery
But still relies on external liquidators and can struggle during extreme volatility. 3/8
Euler v2's Innovation: Liquidation Vaults
⢠Automated liquidation through smart contracts
⢠No need for external liquidators
⢠Instant execution when health factor drops
⢠Reduces systemic risk
Gamechanger for protocol safety. 4/8
Fluid's Approach: Smart Liquidations
⢠Dynamic liquidation thresholds
⢠Automated rebalancing
⢠Gas-efficient execution
⢠Built-in MEV protection
Designed to prevent cascading liquidations during market stress. 5/8
Morpho's Design: Optimized Liquidations
⢠Peer-to-peer matching reduces liquidation needs
⢠When liquidations occur, they're capital efficient
⢠Lower liquidation penalties
⢠Better user experience
Focus on preventing liquidations vs just handling them. 6/8
Other Notable Mentions:
⢠Solend: Circuit breakers during volatility
⢠Compound v3: Absorb mechanism for small positions
⢠Liquity: Stability Pool for instant liquidations
Each protocol learned from past failures. 7/8
Key Takeaway: Liquidation design isn't just about recovering bad debtâit's about maintaining protocol stability during black swan events.
The next market crash will test these new designs. Which will survive? đ¤
#DeFi #Liquidations #BlackThursday 8/8
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