Liquidations as MEV

Aave, Compound, Maker/Sky, Morpho, Maple — the liquidation engines that anchor on-chain credit. Dutch auctions, keeper bots, and the Just-In-Time liquidity strategy on Uniswap v3.

30 min · expert · part of MEV Searcher Strategies

Why Liquidations Are MEV

Lending protocols cannot function without somebody closing underwater positions. When the value of collateral drops below a configured threshold, the position becomes liquidatable — anyone with capital and the right transaction can repay part of the debt and seize a slice of collateral at a discount. The discount (typically 5-12%) is the liquidator's bounty. The protocol stays solvent. The borrower loses the discount but avoids deeper insolvency. Liquidation work is a textbook example of constructive MEV. It is socially necessary: without timely liquidations, lending protocols accumulate bad debt, depositors lose money, and the system unwinds chaotically. It is competitive: many liquidators race to be the first to close a position, which drives the discount margin down and benefits borrowers via tighter spreads. And it is denominated in real economic value: the liquidator captures the discount; the protocol receives loan repayment; the depositor pool stays whole. By DeFiLlama and Galaxy Digital research data, cumulative on-chain liquidation volume across Aave, Compound, Morpho, Sky (formerly MakerDAO), and Spark exceeded $25 billion by mid-2025. Large stress events drive concentrated bursts — the March 2023 USDC depeg, the August 2024 yen-carry-unwind cross-asset selloff, and the September 2025 ETH staking-yield reset each generated single-day liquidation volumes north of $300M. This lesson covers the major liquidation venues, how their engines work (fixed-discount vs Dutch auction), how keeper bots are structured, and the related strategy of Just-In-Time (JIT) liquidity provision.

Also in this lesson

Aave V3 and Fixed-Discount Liquidations
MakerDAO LIQ 2.0 and Dutch Auctions
Compound, Morpho, Sky, Maple, Spark
JIT Liquidity: A Related MEV Strategy

Key terms

Liquidation: The act of closing an undercollateralized lending position by repaying debt and seizing collateral at a configured discount (typically 5-12%). The discount is the liquidator's bounty; the protocol stays solvent.
Health Factor (HF): Aave's position-health metric: (collateral value * liquidation threshold) / debt. Positions become liquidatable when HF < 1. Keeper bots track HF for every position at every block.
Close factor: The maximum fraction of a position's debt that can be repaid in a single liquidation. Typically 50% on Aave V3, with exceptions for very small positions where 100% is allowed.
Dutch auction (LIQ 2.0): MakerDAO/Sky's liquidation mechanism: auction price starts high and decays linearly over a fixed duration (~6 hours for ETH-A), letting any keeper buy at the current price atomically. Replaces error-prone English auction.
Keeper bot: An automated agent that monitors lending protocols for liquidatable positions, calculates profitability, and submits liquidation transactions. The top 10 Aave keepers capture ~70-80% of volume by 2024-2025.
JIT (Just-In-Time) liquidity: A Uniswap v3-specific MEV strategy: provide highly concentrated liquidity for a single block to capture fees from a large pending swap, then immediately withdraw. ~8-15% of v3 swap volume by dollar value.
Compound Comet (V3): Single-asset-per-market lending protocol launched 2022. Protocol absorbs underwater positions then auctions the collateral, simplifying keeper-bot architecture vs Aave's direct-liquidation model.
Morpho Blue: Minimal lending primitive launched 2024 supporting 200+ custom markets with creator-set liquidation parameters. Attractive venue for keepers covering long-tail assets that bigger protocols won't list.

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Educational only — not financial advice.