Liquidations as MEV

What you'll learn

• Why Liquidations Are MEV
• 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.