mev-toolkit/liquidations

liquidations

tl, dr

• lending protocol (e.g. aave or maker) liquidations present a well-known MEV opportunity. they 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 protcol allows anyone to liquidate the collateral (similar to margin calls in traditional finance).
• 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 opportuniy at a block and issues a liquidation tx, which is expected to be include 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 which will create a liquidation opportunity (e.g., an oracle price update tx rendering a collaterized debit to be liquidated), then backruns this tx with a liquidation tx to avoid the fee bidding competition.

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resources

• liquidations, by aave protocol
• liquidation dashboard, by eigenphi
• understanding compound's liquidation, by zengo
• nahtan worsley's liquidation strategies, by forbes