Jan 14, 2020 ⋅ 2 min read
In his first piece for Dragonfly Research, Tom Schmidt examined the role liquidators play in decentralized credit markets. As all loans are required to be over-collateralized, a system needs to be in place to prevent borrowers from running away with their loan if their collateral falls below the loan value. Before this can happen, once the collateral value falls below a certain threshold (always >100% of the loan value), any user can repay the loan for the borrower in return for the collateral plus some liquidation fee.
Liquidators are similar to miners in that they perform useful services for the network and are compensated based on encoded rules. To date, this has been a profitable activity for many, earning nearly $1 million last year. However, there are several factors leading to decreased profit margins:
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