Liquidation by the protocol

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The discussion revolved around the idea of Aave handling liquidations itself, with Ootsun suggesting potential benefits could be directed towards the safety module, returned to users, or given to $aave holders. The conversation also touched on the importance of decentralization, the comparison to Liquity's liquidation mechanism, the issue with Harmony AAVE V3 and depegged stable tokens, and a proposal by EitanKat for a user-based backstop for GHO on Aave.

The discussion was initiated by Ootsun, who questioned why Aave doesn't liquidate positions itself and suggested that the benefits could be directed towards the safety module, returned to the user, or given to $aave holders1. Fig introduced a tool by Flipside to better inform users about liquidations2, while Pakim249 emphasized that liquidations are a last resort to protect depositor funds, especially during volatile market conditions. They also highlighted the importance of decentralization, stating that if Aave controlled the liquidations, it would mean the system is not decentralized3.

Ootsun further inquired if Aave could implement a mechanism similar to Liquity, which handles liquidations itself5. This led to ClothingCavalryForce suggesting the idea be made into an EIP and put to a vote6. The importance of liquidations and decentralization was further discussed by Harry_Feldman and EzR3aL 7,9. Meanwhile, Tobes brought up a specific issue with Harmony AAVE V3 and depegged stable tokens 8,10,11,12.

Towards the end of the discussion, EitanKat proposed a user-based backstop for GHO on Aave, which would allow platform users to benefit from profitable liquidations13. They also highlighted the risks associated with GHO's bad debt, stating that it's riskier than other standard bad debts because it can cause GHO to lose its value and stability, which are dependent on the collateral assets backing it13. This discussion provides valuable insights into the complexities of liquidations and the importance of decentralization in the Aave ecosystem.

Posted 2 years ago

Last reply a year ago

Summary updated 2 months ago

Last updated 03/12 08:01