Gas Fee Impact on Liquidations

Gas fee impact on liquidations refers to the cost of executing smart contract transactions required to close undercollateralized positions on a decentralized exchange. When a user's collateral falls below a maintenance threshold, the protocol must trigger a liquidation transaction to sell the assets and repay the debt.

Because these transactions require gas to be processed by blockchain validators, high network congestion or volatile gas prices can make the liquidation process prohibitively expensive. If the cost of the gas exceeds the profit margin of the liquidation, liquidators may ignore the position, leaving the protocol exposed to bad debt.

This creates a risk where market volatility increases both the number of liquidations and the gas costs, potentially delaying essential liquidations during crashes. Understanding this impact is crucial for designing robust margin engines that account for network throughput limitations.