DeFi Liquidation Vulnerabilities

Prompt and efficient liquidation is crucial to maintaining solvency in DeFi protocols, yet it is among the hardest and most complex code to implement in a safe and especially trustless manner. There are many potential vulnerabilities and bugs which can have disastrous effects on protocol solvency and user trust, resulting in liquidation implementations having high “bug density”. Smart contract developers and auditors should take note of the following vulnerability classes and verify whether their liquidation code is vulnerable.

Two common terms frequently used with their definitions:

1. Liquidatable : collateral_value * loan_to_value_ratio < borrow_value
- sufficient collateral remains to cover the borrow
- no bad debt is created if promptly liquidated

2. Insolvent : collateral_value < borrow_value
- insufficient collateral remains to cover the borrow
- creates bad debt for the protocol even after liquidation

The goal of liquidation is to avoid bad debt by promptly liquidating “Liquidatable” positions so they do not become “Insolvent”.

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Link: https://dacian.me/defi-liquidation-vulnerabilities