Liquidator Incentive Structure

Liquidator Incentive Structure defines the rewards and mechanisms that encourage independent actors to monitor and liquidate under-collateralized positions. These incentives are necessary to ensure that the protocol remains solvent without requiring centralized intervention.

Liquidators incur costs, such as gas fees and the risk of holding the liquidated collateral. Therefore, the reward must be sufficient to cover these costs and provide a profit margin.

This structure is often implemented through a liquidation bonus or a discount on the liquidated asset. If the incentive is too low, no one will perform the liquidation, putting the system at risk.

If it is too high, it unnecessarily penalizes the borrower. Balancing this structure is essential for a healthy, self-regulating decentralized ecosystem.