Summary
This proposal recommends the development of a DAO-operated liquidation operator that can borrow from Liqwid markets without collateral only for liquidation purposes.
The executor would borrow the debt asset, liquidate an unhealthy position, seize collateral, swap the collateral back to the borrowed asset, repay the principal plus minInterest, and send any net profit to the DAO treasury.
This does not give the DAO exclusive liquidation rights, increase borrower penalties, or prevent third-party liquidators from operating.
Motivation
Liquidations protect protocol solvency, but today they mostly depend on technically capable bot operators with idle capital available. This creates two barriers: infrastructure and liquidity.
The in-app liquidation flow helps non-technical users participate, but bot operators still execute most liquidations. If liquidation incentives are reduced by a fee split (as proposed in Temperature check: Enable liquidation fee split, some private liquidators have referred they’d reduce activity, especially when profitability is uncertain after slippage, DEX fees, contention, and execution costs.
A DAO-operated executor would act as an additional liquidation backstop and create a new DAO revenue stream without requiring the DAO to keep large amounts of idle capital.
Proposed Mechanism
Governance should authorize a DAO-controlled liquidation executor with the following limits:
- Liquidations only - uncollateralized borrowing may only be used to execute Liqwid liquidations.
- Short-term borrow-then-liquidate flow - borrow, liquidate, swap seized collateral, repay principal plus minInterest, and send remaining profit to the DAO treasury.
- minInterest remains enabled - suppliers should be compensated for the temporary credit exposure.
- No liquidation monopoly - third-party liquidators keep equal access to liquidation opportunities.
- Initial scope is limited - start with ADA, NIGHT, and stablecoin markets only.
- Risk parameters required before activation - each market must have caps for maximum borrow size, maximum open exposure, maximum loan duration, slippage, approved DEX routes, pause conditions, and reporting.
Benefits
This would:
- Improve liquidation reliability during volatile markets.
- Reduce dependence on a small number of external bot operators.
- Let the DAO capture liquidation revenue without holding idle capital.
- Compensate suppliers through minInterest.
- Preserve public liquidation access for independent liquidators.
- Provide a safety backstop if liquidation fee splits reduce private liquidator participation.
Risks
The main risk is that this is not a true atomic flash loan. The borrow, liquidation, swap, and repayment happen across multiple transactions, so execution can fail if another liquidator wins first, the position becomes healthy, the swap fails, or slippage/trade fees makes the liquidation unprofitable.
There is also lender risk because the DAO borrows without collateral, and governance risk because the DAO receives a privilege unavailable to regular liquidators.
These risks should be mitigated through strict caps, short loan duration, minInterest, conservative slippage limits, approved routing, public reporting, technical review before activation, and a governance-controlled pause mechanism. The DAO treasury should act as the first-loss backstop for any shortfall caused by DAO liquidation execution.
Out of Scope
This proposal does not:
- Increase borrower liquidation penalties.
- Change liquidation bonuses.
- Disable third-party liquidators.
- Enable uncollateralized borrowing for any purpose other than liquidations.
- Add LQ staker revenue sharing.
- Add pre-liquidation or soft-liquidation mechanisms.
Success Criteria
The mechanism should be considered successful if:
- Liquidations remain timely and reliable.
- DAO liquidation activity is net profitable after minInterest, DEX fees, slippage, and execution costs.
- Supplier exposure remains controlled and compensated.
- Bad debt does not increase.
- Third-party liquidator participation does not materially deteriorate.
Governance should monitor DAO liquidation revenue, failed liquidation attempts, open exposure, repayment speed, slippage, liquidation speed, active third-party liquidators, and any bad debt.