Liquidator Incentive Models

Liquidator Incentive Models are the economic structures designed to encourage independent actors to monitor and execute liquidations on a platform. Since liquidations require active monitoring and gas costs, protocols must offer a reward, usually in the form of a percentage of the liquidated position.

This reward must be high enough to make the effort profitable, but not so high that it creates an incentive for malicious behavior. The competition among liquidators ensures that liquidations happen as quickly as possible, which minimizes slippage and protects the system.

These models are essential for the decentralization of the liquidation process, removing the need for the protocol to perform the task itself. It is a core application of behavioral game theory in the crypto space.