Flash Loan Liquidation Mechanics

Flash loan liquidation mechanics involve the use of uncollateralized, instant loans to execute liquidations on a protocol. A liquidator borrows a large amount of capital from a flash loan provider, uses it to pay off the bad debt, receives the discounted collateral, sells it on the open market, and repays the flash loan, all within a single transaction.

This allows anyone with coding knowledge to participate in liquidations without needing their own capital. This mechanism significantly increases the efficiency of liquidations and ensures that protocols are liquidated quickly when they hit their thresholds.

However, it also means that competition for liquidations is intense and favors those with the fastest execution speeds. It is a defining feature of DeFi market efficiency.