Arbitrage Liquidation Exploits

Arbitrage liquidation exploits occur when an attacker forces a protocol to liquidate user positions by inducing a temporary, artificial price deviation. By using a flash loan to move the price of an asset on a specific exchange, the attacker triggers liquidation mechanisms in lending protocols that rely on that exchange's price feed.

The attacker then collects the liquidation bonus, which is a fee paid to liquidators for maintaining the health of the protocol. Because the price manipulation happens within a single transaction, the attacker can profit from the liquidation before the market price corrects itself.

This behavior turns the protocol's own safety mechanism against its users, effectively stealing value from collateralized positions.