Liquidations
Liquidations are a crucial safety mechanism in Euler that helps maintain the protocol's solvency and protect lenders' deposits. When a borrower's position becomes undercollateralized, the liquidation process kicks in to ensure that debts are covered and the system remains stable. This process is automated, efficient, and designed to be fair to all participants.
How Liquidations Work
When you borrow assets on Euler, you're required to maintain a certain level of collateral relative to your debt. If your position's risk-adjusted collateral value falls below its debt level, it becomes eligible for liquidation. This can happen when market prices move against your collateral, when interest accrual increases your debt, or when your health factor drops below the threshold.
When a position becomes eligible for liquidation, liquidators can step in to take over the debt and receive the collateral at a discount. This discount is proportional to how undercollateralized the position is, and it's carefully set by vault creators to balance incentives without imposing excessive penalties on borrowers. The entire process is designed to maintain the protocol's stability while being fair to all participants.
Liquidation Parameters
Vault creators have several tools to fine-tune the liquidation process. The maximum discount parameter is particularly important as it determines how much incentive liquidators have to step in. This parameter needs to be set carefully - too high and it could lead to harmful liquidation spirals, too low and liquidators might not be motivated to act.
An optional but recommended cool-off period can be implemented to prevent immediate liquidations after a user creates their borrow position. This period creates a short buffer that helps reduce the risk of certain attack types and stabilizes vaults, especially when using pull-based oracles. It ensures that liquidations only happen when truly needed, rather than due to momentary price shifts or market manipulation.
By default, vaults have bad debt socialization enabled. This means that if a liquidated account's collateral doesn't fully cover its obligations, the remaining liability is shared across all depositors in the vault. This promotes vault-wide stability, though vault governors can disable this feature if they prefer alternative methods to manage bad debt.
Liquidation Protection
Euler offers several layers of protection against liquidations. The first layer comes from automated monitoring through MEV bots that actively search for liquidation opportunities. Euler Labs maintains an open-source liquidation bot, and partners operate additional bots for redundancy, ensuring the system remains responsive.
For users who want more control, EVC operator protection provides a sophisticated way to manage liquidation risk. This system allows you to set custom stop-loss conditions, define specific reward structures, and specify slippage limits. It gives you the flexibility to manage your risk in ways that suit your specific needs and preferences.
Best Practices
To minimize liquidation risk, it's essential to maintain a comprehensive understanding of your position. This means keeping track of your health factor, watching market conditions that affect your collateral, and understanding how interest accrual impacts your debt over time.
Maintaining adequate safety margins is crucial. This involves keeping sufficient collateral buffers, considering market volatility in your position sizing, and accounting for potential interest rate changes. Remember that the market can move quickly, and having these buffers in place can make the difference between a safe position and one that's at risk.
Consider using the available protection tools to their full advantage. EVC operator protection can provide automated management (not yet available) of your position, and setting up alerts for health factor changes can give you early warning of potential issues. Always have a plan for adding collateral if needed, and make sure you understand how liquidation discounts, cool-off periods, and bad debt socialization work in your specific vault.
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.