Liquidator Incentive Structures

Liquidator incentive structures are economic designs that encourage external actors to execute the liquidation of under-collateralized positions. By offering a discount on the seized collateral or a fee from the liquidated position, protocols ensure that there is always a market participant willing to perform the necessary sale.

This incentivization is crucial because it offloads the technical burden of monitoring and executing liquidations from the protocol developers to the market. The design must be calibrated to ensure sufficient participation during periods of low volatility while remaining robust during market crashes.

If incentives are too low, liquidations may fail, leading to protocol insolvency.