An empirical study of DeFi liquidations

Financial speculators often seek to increase their potential gains leverage. Debt is a popular form of leverage, and with over 39.88B USD of total value locked (TVL), the Decentralized Finance (DeFi) lending markets are thriving. Debts, however, entail the risks liquidation, the process of selling the debt collateral at a discount liquidators. Nevertheless, few quantitative insights are known the existing liquidation mechanisms. this paper, to the best of our knowledge, we are the first to the breadth of the borrowing and lending markets of the DeFi ecosystem. We focus on Aave, Compound, MakerDAO, and dYdX, which collectively represent over 85% of the market on Ethereum. Given extensive liquidation data measurements and insights, we systematize the prevalent liquidation and are the first to provide a methodology to compare objectively. We find that the existing liquidation designs well liquidators but sell excessive amounts of discounted at the borrowers’ expenses. We measure various risks liquidation participants are exposed to and quantify the instabilities of existing lending protocols. Moreover, we propose an strategy that allows liquidators to increase their liquidation , which may aggravate the loss of borrowers.