Enable liquidation fee split

Temperature Check
1

Summary

This proposal recommends enabling a 50% liquidation fee split for ADA, NIGHT and stablecoin collateral markets.

The borrower’s liquidation penalty would remain unchanged. The change only affects how the liquidation bonus is distributed: 50% would remain with liquidators and 50% would be redirected to protocol revenue.

This scope is intentionally limited to more liquid collateral assets. Most CNT collateral markets should remain unchanged because weaker liquidity, higher slippage and greater inventory risk make it important to preserve current liquidator incentives.

Year-to-date, Liqwid analytics show approximately $167.28k in liquidation profits paid entirely to liquidators. A 50% split would have redirected approximately $83.64k to the protocol while still leaving $83.64k for liquidators before transaction costs, DEX fees, slippage and operational overhead.

Motivation

Liquidations protect protocol solvency, but Liqwid currently gives 100% of liquidation bonus value to liquidators. This leaves the protocol with no direct share of liquidation surplus generated by its own markets.

A 50% split improves protocol revenue capture while keeping liquidation incentives attractive in liquid markets. For example, where the liquidation bonus is approximately 11.11%, liquidators would still retain an approximate 5.555% gross margin after the split.

This proposal does not increase liquidation penalties for borrowers. It only reallocates part of the existing liquidation bonus.

Scope

The liquidation fee split should be enabled only for:

  1. ADA collateral markets.
  2. NIGHT collateral markets.
  3. Stablecoin collateral markets.

The split should remain disabled for other CNT collateral markets unless changed by a future governance proposal.

This approach limits risk. ADA, NIGHT and stablecoins are expected to have stronger liquidity and lower liquidation execution risk. By contrast, many CNTs are less liquid, and reducing liquidator upside in those markets could slow liquidations or increase bad debt risk without producing meaningful protocol revenue.

Comparable Protocol Context

Other lending protocols increasingly capture part of liquidation surplus through explicit fee splits, auctions or oracle value recapture.

Aave is the clearest example. Aave integrated Chainlink Smart Value Recapture, or SVR, to recapture liquidation-related oracle MEV that previously leaked to searchers, builders and validators. Aave reported that SVR handled approximately $675M in liquidations across about 3,900 events, recapturing approximately $16M in total revenue split 65% to Aave and 35% to Chainlink, with a reported 73% average recapture rate of non-toxic liquidation MEV.

Chainlink describes SVR as a system for recapturing oracle-related liquidation value and splitting recaptured revenue between the integrating DeFi protocol and the Chainlink Network. Aave governance also describes SVR as an auction mechanism where searchers compete for the right to back-run oracle price updates, redirecting value back to the protocol-defined recipient.

LlamaRisk’s Aave SVR dashboard tracks value recaptured, total liquidations, revenue share, per-asset recaptures and liquidation bonus split across SVR-enabled Aave markets.

Additional analytics references:

The broader trend is clear: liquidation surplus is increasingly shared between liquidators, protocols, oracle networks or users, rather than flowing entirely to liquidators.

Revenue Impact

Based on Liqwid’s current year-to-date liquidation profit figure of approximately $167.28k, a 50% split would have captured approximately $83.64k for the protocol.

Future revenue will depend on liquidation volume, market volatility and collateral mix, but the mechanism gives Liqwid a clear way to retain part of the liquidation surplus generated by its own markets without increasing borrower penalties.

Risk Considerations

The main risk is reduced liquidator participation. This is mitigated by limiting the initial rollout to liquid collateral markets where a 50% split should still leave attractive liquidation margins.

Governance should monitor liquidation speed, active liquidator count, slippage, failed liquidations and any bad debt after implementation. If liquidation performance deteriorates, governance can reduce the split or disable it for specific markets.

Proposed Changes

If approved, the Parameter Committee shall:

  1. Enable a 50% liquidation fee split for ADA collateral markets.
  2. Enable a 50% liquidation fee split for NIGHT collateral markets.
  3. Enable a 50% liquidation fee split for stablecoin collateral markets.
  4. Keep the split disabled for other CNT collateral markets.
  5. Leave liquidation bonuses and all other market parameters unchanged.
  6. Monitor liquidation performance, protocol revenue and bad debt risk after implementation.

Measuring Success

This proposal should be evaluated using:

  1. Protocol revenue captured from liquidation fee splits.
  2. Liquidator revenue retained after the split.
  3. Number and speed of successful liquidations.
  4. Number of active third-party liquidators.
  5. Slippage and execution quality.
  6. Any delayed liquidations, failed liquidations or bad debt.
  7. Comparison with CNT markets where the split remains disabled.

The proposal should be considered successful if protocol revenue increases without materially weakening liquidation reliability.

Conclusion

Liqwid currently directs 100% of liquidation bonus value to liquidators. A targeted 50% split for ADA, NIGHT and stablecoin collateral markets would improve protocol revenue capture while preserving meaningful liquidator incentives and keeping borrower penalties unchanged.

The proposal is intentionally conservative: it applies only to more liquid collateral assets and leaves less liquid CNT markets unchanged. This makes it a prudent first step toward improving Liqwid’s protocol economics while maintaining liquidation safety.

1 Like
Enable DAO-Led Liquidations Using Short-Term Uncollateralized Loans
2

One concern: small loans with bad debt.
Are they still attractive to liquidate at a 50% cut ? Would people still bother running their bots for them or would them filter them out ?

Also, this proposal would benefit from presenting data on:

  • the cost of operating liquidation bots,
  • the actual profitability of operating liquidation bots (after fees, slippage, contention issues in stressed markets, etc),
  • the current number of liquidation bots running.

=> otherwise I can’t make an informed opinion on:

  • the economic impact on people running the liquidation bots,
  • the headroom before low liquidation bots numbers
3

The question of would individual liquidation bot operators continue running their infra in an automated unbiased approach is an important topic for the DAO to discuss and one reason I am in favor of exploring the technical complexity involved with uncollateralized borrowing for DAO-operated liquidations. This would ensure timely liquidations during volatile price movements even if current liquidations opted to not run their bots and app users decide to not complete manual liquidations through the UI. I see this as a necessary security step if we are to activate the liquidation fee switch.

3 Likes
4

I would favor a DAO led Liquidation model, long term.

Any of the following options would we great to explore:

  1. its LQ staked backed collateral and the LQ stakers received a % of the total 100%.

2. Using the supplied pools as the collateral- no fees or maintain the min. borrow fee.

3. partnering with DEXs to explore ‘personalized’ routing

side topic. Would also like to see an exploration of a Pre-liquidation support by the DAO.

If a loan is between 1-1.149 HF. the pre-liquidation support could kick in, where the loan can use the collateral to repay debt, and the DAO collects a % fee there. allowing the borrowing to increase their HF and saving themselves from a full liquidation or the inability to retrieve their collateral.

For the main topic- would be good to look at some past liquidations and see what the Real liquidation profit was. meaning on paper 11.11% turns into what % after fees, slippage and price movements.

I believe a bot liquidator noted in Discord that 50% split would make them no longer automatically liquidate.

Again, I support DAO led liquidation exploration. I believe this is the greatest opportunity to support all parties( maybe not current liquidators)

5

Thanks, I think these are fair concerns.

On the first point: bad debt is never profitable to liquidate. However, for micro-positions, it also does not represent a large risk to the protocol. The key question for liquidators is not really the absolute size of the position, but whether the liquidation remains net profitable after all costs: trade fees, slippage, contention, and, in the borrow-then-liquidate model, minInterest. As long as the net profit is positive, there is still an incentive to liquidate, regardless of position size.

That said, I do think we should introduce a formal mandate for the parameter committee to update minValue as often as needed to keep it near at least $30 across the board. Historically, we have proposed this value, but we have not given the committee explicit authority to adjust the token-denominated parameter so it stays close to that $30 target. This matters because market movements can make the parameter drift significantly. ADA is a good example: it briefly traded above $1, and is now around $0.15–$0.18. Keeping minValue updated is one of the tools that helps mitigate the appearance of micro-positions in the protocol.

On liquidation bot operating costs: they can vary widely. The cheapest possible setup can be close to free, using free hosting providers, free SaaS Blockfrost tiers, and similar infrastructure. The main caveat is that the bot or operator still needs capital availability / liquidity so it can actually meet liquidation obligations.

On profitability: this depends heavily on the bot and the strategy. Current observed profitability may be below what is theoretically possible because competition is still relatively low and strategies may not be fully optimized. Artifi Labs is currently setting up a high-quality liquidation bot, which should further reinforce Liqwid’s liquidation mechanism. Open-sourcing Liqwid V2, which is also in progress, should make liquidations more accessible to a broader technically capable audience.

On the current number of liquidation bots: this is not something we can measure directly. The best proxy is the number of unique addresses that participated in liquidations over a given period. Even that has caveats. For example, one operator with a much better bot - lower node latency, transaction chaining, faster decision-making, and better-optimized transaction-building code - may capture most liquidations. There could be other liquidators watching the same positions, but we would not see them if they are consistently beaten to execution. We know Dan is one of the protocol’s primary liquidators because his infrastructure and bot are well-optimized relative to the competition.

As Dewayne mentioned under your comment, I also think the DAO should consider operating a liquidation bot that can mimic flash-loan behavior through very short-term uncollateralized loans. This would further reinforce the liquidation mechanism, create an additional income stream for the DAO, and compensate lenders for the risk they take by enforcing minInterest. Today that is set at 0.2%, meaning the DAO would pay lenders a flat 0.2% immediately when executing uncollateralized-borrow-then-liquidate strategies. Conceptually, this is not dissimilar from Aave’s flat flash-loan fee.

We can also try to simulate what liquidating ADA, NIGHT, and stablecoin debt positions looks like in terms of net profitability by cross-checking protocol liquidation metrics: profit in collateral, cost in debt, and the result of swapping collateral on DEXs. My expectation is that, even after fees, a well-designed and well-implemented liquidation bot should still achieve net profit above 3-4% on instant liquidations with the proposed fee split. That is a very strong incentive compared with large-scale competitors like Aave and Kamino Lend.

And to be clear, I am saying this as someone who, despite proposing the 50% fee split, is also in the process of setting up a liquidation bot. So I am directly exposed to the economic impact this proposal may have on liquidators.

1 Like
6

I broadly agree that DAO-led liquidations are worth exploring mid-term, and I also agree that maintaining minInterest is important if the DAO uses supplied liquidity or a borrow-then-liquidate model.

Where I would be more cautious is around sharing DAO liquidation profits with LQ stakers at this stage. The protocol still needs to become sustainable first. Sharing revenue while the DAO/protocol is still effectively operating at a loss would be premature, in my opinion. I do think the time for revenue sharing will come, but we should not rush into it before we have invested enough into reaching the protocol’s full potential.

On pre-liquidation support, I am not personally in favor of that model. It reminds me of CDP protocol position redemptions, which we have discussed multiple times before. The conclusion has generally been the same: users should not be penalized before they absolutely need to be. If a position is still above the liquidation threshold, I think we should be careful about introducing mechanisms that effectively charge or penalize the user before liquidation is strictly required.

What I do like, however, is the concept of a sliding liquidation incentive based on position health and protocol risk. Kamino Lend does this: the liquidation incentive at 0.99 HF is lower than at 0.95 HF, for example. That makes sense to me because the more risk a position poses to the protocol, the stronger the incentive should be for liquidators to close it.

The concern with that model is that liquidators may wait for positions to become more profitable before liquidating. But in practice, that risk is mitigated by competition between liquidation bot operators. If you wait too long, another liquidator is likely to capture the opportunity first.

I think this is a genuinely innovative mechanism and it seems to align with where the broader ecosystem is moving. I have even seen similar ideas proposed for Aave after Kamino had already implemented this model. I would love to see something like this implemented for Liqwid.

That said, I do not think it can be backported to V2. This would need to be part of V3, and probably not at launch either, because it would increase time to market. Right now, we should be reducing V3’s time to market, not extending it.

On the main question of real liquidation profitability, I agree that looking at past liquidations would be useful. The headline 11.11% is only the theoretical starting point. What matters in practice is the net profit after fees, slippage, contention, price movement, and execution costs. That analysis would help make the discussion more concrete.

So overall: I support DAO-led liquidation exploration, I support keeping minInterest, I would not support LQ staker revenue sharing yet, and I would prefer exploring dynamic/sliding liquidation incentives at a later stage over pre-liquidation support.

1 Like
7

Agreed on the profit sharing piece. A point of clarification, that was not shared earlier, would be if current LQ staked was need to back a loan, then a profit share should be availible. However, the DAO treasury has a significant amount of LQ, where it most likely would not need LQ from the staked pool.

The pre-liquidation window when 1-1.1499 HF was more. What you described, 100% dont support either. What I was referring to. Example. Say I have a $1,000 loan and the HF is 1.10. I have no other money available to me to increase my HF. I have a strong conviction that my HF will continue to drop and that I will be liquidated and incur the 11.11% penalty. I would like the option to ask the DAO to help me out. I would personally opt in and have the DAO liquidate my loan and in stead of 11.11% I only get a penalty of 5%. Or maybe I have a bill i need to pay and need to get out of the loan ASAP. Idea is more like a repay with collateral option. Could I sell my loan and clear it out in one click to the DAO and then get the collateral back minus a fee.

The Sliding scale fee is very interesting and borrower friendly. Would make since to explore the profitability of liquidations in conjunction.

Overall- Support the Dao-led liquidation, MinInterst.

1 Like
8

Oh I see what you mean now! This is much more like Aave’s opt-in soft liquidation mechanism where as your health factor drops to a certain range, the protocol automatically starts selling and replacing your collateral for GHO, their home-grown stablecoin. It’s interesting, for sure! Could be an idea for a later iteration of V3.

1 Like
9

@ConkeyKong @DC1 @gil I’ve created a second temperature check based on our discussion above: Enable DAO-Led Liquidations Using Short-Term Uncollateralized Loans.

10

After the recent liquidation events and with bad loans occurring, I wanted to share a thought process I had while liquidating.

Loans with a HF of 0.85 versus a loan with a HF of 0.98. I was more inclined to try to liquidate the one with the HF of 0.98 because I knew that if the collateral of NIGHT price stabilized, that loan would return to a HF above 1 before the 0.85. And since both loans would pay out the same penalty/reward, I saw as a liquidator for more opportunities to liquidate the higher HF Loans.

I agree it makes sense to look at the incentivization for liquidating.

1 Like