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Liquidations

Euler's standard liquidation mechanism is among the most efficient in DeFi because it avoids paying a large fixed liquidation bonus. Its reverse Dutch auction starts at zero discount at the liquidation threshold and increases linearly only as health worsens, allowing competition to clear positions at the lowest bonus the market will accept.

Low bonuses through price discovery

The auction is the main source of efficiency. Position transfer provides an additional capital-efficiency advantage for liquidators.

Reverse Dutch auctionThe bonus starts at zero

Euler does not grant a large fixed bonus. The discount starts at zero at the threshold and rises linearly with the health shortfall until a liquidator executes or the configured maximum is reached.

Additional efficiencyDebt and collateral move together

After the auction determines the bonus, the liquidator inherits selected debt and receives discounted collateral in one operation. No full repayment asset is required upfront.

Unlike a fixed-bonus system, Euler does not overpay liquidators for positions that are only slightly unhealthy. Competition can settle them close to the threshold with minimal collateral loss, while deeper shortfalls offer progressively more incentive. Position transfer then lowers the capital required to execute.

How it works

Euler compares the account's risk-adjusted collateral with its liability:

health = risk-adjusted collateral value / liability value

When risk-adjusted collateral no longer exceeds liability, the account is eligible for liquidation. A displayed health value may be rounded, so raw values and transaction simulation are more reliable near the threshold.

During liquidation:

  1. The liquidator chooses a liability and an enabled collateral asset.
  2. The liquidator takes over some or all of the account's debt.
  3. The liquidator receives collateral at a discount that increases as health falls, up to the vault's configured maximum.
  4. The transfer is capped by the debt and collateral actually available, and the liquidator's resulting account must pass its required checks.

The liquidator must enable the liability vault as a controller and enable the received vault shares as collateral. Because the available collateral caps the transaction, a liquidator cannot receive more collateral than the unhealthy account holds.

What affects the outcome

  • Liquidation LTV determines when collateral no longer sufficiently covers the debt.
  • Maximum liquidation discount limits the incentive available to liquidators.
  • Cool-off time, when configured, delays liquidation after the account's last successful status check.
  • Market liquidity should be checked for both the collateral and debt assets. Liquidators need to sell or hedge received collateral and manage or repay inherited debt; thin liquidity can make liquidation unattractive even when an account is eligible.
  • Oracle prices, gas, and slippage affect whether a liquidation is practical and profitable.

If liquidation exhausts an account's collateral and qualifying debt remains, the vault can socialize the remaining loss across depositors only when that behavior is enabled and the contract's conditions are met.

Liquidation bot

A liquidation opportunity is not guaranteed profit. Liquidators must account for the inherited debt, collateral liquidity, oracle behavior, gas, slippage, and the health of their resulting account.

Developers can start with the liquidation bot guide, which links to Euler's open-source liquidation infrastructure and EVC flow.

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