Liquidation Bonus Arbitrage

Liquidation bonus arbitrage is the practice of capturing the difference between the value of the liquidated collateral and the debt repaid to the protocol. Protocols offer this bonus to incentivize liquidators to act quickly and efficiently.

Arbitrageurs compete to perform these liquidations, often using advanced strategies to maximize their profit while minimizing their gas costs. This competition is what keeps the market efficient and ensures that bad debt is minimized.

However, it also means that the cost of liquidation is higher for the borrower, who loses the bonus amount. This is a classic example of how incentives are used to drive desired behavior in decentralized systems.