The LiquidOps Auction Model
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Liquidations possess a key role in DeFi protocols. They are fundamental elements of the protocol’s operation, because they ensure that loans without enough collateral are repaid as quickly as possible.
Successful liquidations require competition between liquidators so debts can be settled quickly and efficiently.
Let’s see how this process works for LiquidOps!
To make liquidators act fast and handle numerous liquidations, we use an auction model for liquidatable positions.
This model works by offering a predetermined percentage discount compared to the market price – in our case, 5% – at the moment the liquidation is detected. This way, liquidators can acquire tokens at a lower price.
To encourage fast liquidation, the auction model decreases the discount percentage linearly over a set period, until the discount reaches 0%. This ensures that liquidators compete to settle the debt as quickly as possible.
It is worth noting that larger protocols typically use a "Dutch auction" model, which starts with a high liquidation bonus that gradually decreases over time until a buyer steps in.
