Four ways to prevent liquidations in DeFi (and one extra tip)

Dread them, run from them, liquidations nonetheless arrive. And liquidation bots received’t care for those who borrowed funds to get your child to school, to lastly purchase your self a brand new set of wheels, or for those who possibly had a light leveraged lengthy place open. No, they’ll hit you simply the identical, proper as quickly as your place dips under that minimal well being threshold.

To have the ability to stop this, let’s begin at understanding what precisely we’re combating towards and why. And that is the place issues already begin getting tough, as a result of the liquidation course of and the outcomes can differ vastly relying on the lending protocol you’re utilizing.

Right here’s a quick rundown of how liquidations work in a few of the hottest lending protocols:

• In Aave (each v2 and v3) liquidations might be as much as 50% of your debt, with various penalties (or bonuses, for those who’re the liquidator) relying on the collateral asset used. Because of this a liquidator can clear 50% of your place’s debt and get the identical worth of your collateral in return, with the suitable bonus then added on high.
• In Compound v2 liquidations will be partial or full, relying on what the liquidator decides. The penalty can even differ relying on the asset you used as collateral.
• in Compound v3 liquidations are to your full debt quantity, however the liquidator will get your full collateral belongings and returns the remaining worth (after making use of your penalty/taking their bonus) within the base asset of the Compound v3 occasion you’re utilizing. So, in case of Compound v3-USDC, as soon as your place with ETH as collateral and USDC as debt is liquidated, you’d really be left with USDC provided. How enjoyable is that?
• In MakerDAO liquidations are full, clearing your full debt, they usually occur with a set liquidation penalty of 13% for all supported sorts (presently ETH, wstETH and WBTC). Because of this the liquidator clears your full debt and will get again the 1.13x worth of your collateral in return. Ouch.
• In Liquity liquidations beneath regular situations (when your c-ratio drops under their 110% minimal) are full. Because of this your full debt is cleared, however you’re additionally left with no collateral leftover to assert in anyway, as that small margin is cut up as incentives between the liquidator and Stability pool depositors. In addition they have liquidations that may occur if the protocol enters Restoration mode,

A few of these choices are very painful and a few are much less harsh, however none of them are fascinating.

So let’s speak about methods to maintain your positions protected and out of the palms of pesky liquidators.

#1 – Place well being alerts

Step one to stopping liquidations is being conscious of the state of your place. Whilst you may simply by no means sleep (think about sleeping on this economic system) and watch the state of your positions in DeFi 24/7, there are simpler methods.

For those who’re utilizing any of the preferred protocols (together with the likes of Aave, Compound, Spark, Liquity), you could possibly simply arrange place well being alerts utilizing DeFi Saver and have them despatched to you by way of e-mail or Telegram.

When you do get an alert, although, you’ll want to contemplate your subsequent steps. Now we have just a few choices to counsel.

#2 – Self-liquidation or partial unwinding as a method of safety

In relation to precise actions to maintain your self out of the palms of the liquidators, that is the oldest trick within the e book.

Some name it unwinding, others name it self-liquidation, however in essence what you are able to do is use your present collateral, the funds which are already throughout the place, to clear a few of your debt. Since all of those positions are overcollateralised, this may successfully imply that your well being ratio strikes up, getting you to safer territories.

And the place DeFi Saver makes this tremendous straightforward is by turning this in any other case 3-step strategy of withdraw-swap-payback into one single transaction that does the entire job for you.

This does contain promoting, although, so if that’s one thing you’d slightly keep away from, right here comes an alternative choice.

#3 – Transferring to a protocol with a better LTV

One other motion you could possibly make to get out of the best way of a liquidator bot is transfer your entire place, as is, to a very totally different protocol with a better allowed LTV.

I really feel like many individuals nonetheless don’t know that is attainable, but it surely’s one of many choices that highlights the fantastic thing about DeFi interoperability the very best for me.

That is one thing that’s made attainable due to flash loans, that are used on this course of to clear your debt and free your collateral to be moved elsewhere. And as soon as the collateral is moved, the identical borrowing is made and used to clear that preliminary flash mortgage. Which will sound complicated, however as soon as once more it’s one thing that you are able to do in a single fast transaction utilizing DeFi Saver.

Simply to maintain your expectations sensible, although – chances are high you received’t discover a protocol that permits a drastically increased LTV, however there may be an possibility that simply enables you to undergo this one market correction with out having to promote something.

#4 – Automated liquidation safety choices

Lastly, for those who’re seeking to take a while away out of your keyboard and pockets, chances are you’ll need to look into automated liquidation safety choices. And fortunately for you, automation options for DeFi lending protocols have been the flagship characteristic of DeFi Saver for years now.

With assist for Maker, Compound, Aave, Spark, Liquity and Morpho Blue, you get entry to various automation choices, although two have proved to be hottest up to now: automated unwinding & cease loss.

Automated unwinding does precisely what you’d anticipate from the title, it makes use of a little bit of your collateral to clear a few of the debt. Similar to with handbook unwinding, the result might be a barely deleveraged and barely safer place.

Equally, cease loss can also be as easy as you’d think about. The distinction being that as an alternative of partially unwinding, it totally closes your place as soon as your set threshold value is hit.

Vital to notice that each one these choices are totally non-custodial, with you staying in command of your belongings always. And maybe additionally vital to notice that that is obtainable throughout Ethereum mainnet, Arbitrum and Optimism, however extra on that under.

#5 – The additional tip – don’t die to gasoline charges

Having lived via various main market crashes, together with Black Thursday 2020 & Might 16 2021, each as a defi person and somebody who gives assist to customers of a defi app, I’ve to spotlight that there’s one factor that individuals typically utterly neglect.

The community is probably the most congested in the course of the largest market crashes.

And which means that is when transaction charges would be the highest. Fuel costs of above 500 Gwei are an everyday factor throughout such occasions, so do not forget that transaction you paid 0.02 ETH yesterday at 20-ish Gwei? That may now be 0.4 ETH, thanks very a lot. After which think about this transaction reverting as a result of it took 2 minutes to get picked up due to the congestion and you need to ship one other one. With one other 0.4 ETH gasoline charge.

So why am I highlighting this? Properly as a result of this cycle, for those who’re sticking to the Ethereum ecosystem like me, you’ve gotten the choice of utilizing L2 networks which can have massively decrease transaction prices. And I’d counsel checking a few of them out earlier than deciding to open your subsequent place in a lending protocol.

For instance, Arbitrum has executed a superb job of attracting liquidity and might positively be thought-about even when your measurement is measurement.

However even for those who’d slightly follow mainnet, you need to at the very least concentrate on this and know when to maintain your place at low leverage and much, far-off from liquidation to keep away from having to take part within the insanity.

That’s all I had in retailer for you in the present day. I hope it was helpful and, till subsequent time, keep protected on the market.🙏

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