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.

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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.

1 Like