Liquidation Bonuses

Liquidation bonuses are financial incentives paid to the liquidator who successfully closes an under-collateralized position. By offering a portion of the borrower's collateral as a reward, the protocol encourages market participants to actively monitor positions and trigger liquidations the moment they become eligible.

This is essential for the health of the derivatives platform, as it ensures that the system is self-regulating and does not rely on manual intervention. The size of the bonus is a balancing act: if it is too small, liquidators may not be incentivized to act, especially during high-gas or high-volatility periods; if it is too large, it can cause unnecessary losses for the borrower and excessive slippage.

The bonus is typically paid out from the borrower's collateral pool, which effectively reduces the total amount returned to the borrower. Effective liquidation bonus structures are dynamic, often adjusting based on market conditions to ensure that liquidations are both profitable for the liquidator and fair to the borrower.