How are liquidations exploited?

Back-running strategies also apply to liquidations whereby a transaction sender wishes to be the first to liquidate a loan right after a price oracle update (which will allow liquidation to be triggered).

  • Fixed spread liquidation used by Compound, Aave, and dYdX allows a liquidator to purchase collateral at a fixed discount when repaying debt.

A detects a liquidation opportunity at block B (i.e., after the execution of B). A then issues a liquidation transaction T, which is expected to be mined in the next block B +1. A attempts to destructively front-run other competing liquidators by setting high transaction fees for his liquidation transaction T.

  • The auction liquidation allows a liquidator to start an auction that lasts for a pre-configured period (e.g., 6 hours). Competing liquidators can engage and bid on the collateral price.

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