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Liquidations

Euler has a robust liquidation mechanism to maintain the solvency of vaults and protect the deposits of lenders. Liquidation on Euler occurs when the account’s risk-adjusted collateral value drops to or below its debt level, prompting automated bots to handle the liquidation process. The liquidation mechanics are designed to be efficient and fair: liquidators receive discounted collateral from the borrower’s vault, incentivizing them to cover the borrower’s debt. Discounts scale based on how much the account is under-collateralized, creating incentives only when liquidation is financially viable. This system maintains protocol stability without unduly penalizing borrowers or offering excessive rewards to liquidators.

Parameters​

Each vault has a maximum liquidation discount parameter which vault creators can set to attract liquidators without excessive impact on borrowers. This setting helps prevent harmful liquidation spirals, unlike systems that offer steep discounts at the onset.

An optional, but recommended, cool-off period can be used to prevent immediate liquidations after the user creates their borrow position. This period creates a short buffer to reduce the risk of certain attack types and stabilize vaults, especially when using pull-based oracles. It ensures that liquidations only happen when needed, rather than due to momentary price shifts or market manipulation.

By default, vaults have bad debt socialization enabled to handle remaining bad debt if the liquidated account's collateral does not fully cover its obligations. This process shares the remaining liability across all the depositors in the vault, promoting vault-wide stability. Vault governors can disable this feature if they prefer alternative methods to manage bad debt.

Liquidation Bot​

Since liquidation operations are profitable, MEV bots are incentivized to proactively search for liquidation opportunities. Euler Labs maintains an open-source liquidation bot operated by Euler Labs and other partners.

Proactive Liquidations​

For added control, users can choose alternate liquidation protection through EVC operators. This allows them to set custom stop-loss conditions, specify rewards, and define slippage limits, giving users the flexibility to manage their risk in ways that suit their needs.