Automated Liquidation Failure

Automated liquidation failure occurs when a protocol is unable to automatically close an undercollateralized position due to technical issues or market conditions. This can happen if the oracle feed is stale, if the network is congested, or if there is simply not enough liquidity to execute the trade.

When this happens, the protocol is left exposed to bad debt, which can threaten its overall solvency. To prevent this, protocols often use multiple liquidation paths or incentivized bots that compete to perform liquidations.

Failure of these mechanisms is a major risk that developers must account for. It requires rigorous testing and the implementation of fail-safes that can intervene if the automated system fails.

Ensuring that liquidations can always be executed is fundamental to the security of lending and derivative platforms. It is a core aspect of protocol resilience.