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Liquidation Bot

Automated software that continuously monitors DeFi lending positions and triggers the liquidation of any position that crosses its liquidation threshold, earning a reward for doing so.

A liquidation bot is automated software that continuously monitors DeFi lending positions across one or more protocols, watching for any position whose loan-to-value ratio has crossed its liquidation threshold (see Kaavon's "Liquidation Threshold" glossary definition), and immediately submits the transaction needed to trigger that position's liquidation the moment it becomes eligible. Liquidation bots are typically run by independent operators competing against each other, since most protocols pay a liquidation bonus or fee to whoever successfully executes the liquidation first.

Liquidation bots are a critical piece of infrastructure keeping DeFi lending protocols solvent, since under-collateralized positions need to be liquidated promptly to protect depositors — a lending protocol with too few active liquidation bots monitoring it, or one where bots can't execute quickly enough during periods of network congestion, risks accumulating bad debt (see Kaavon's dedicated glossary entries on DeFi lending risk) from positions that should have been liquidated but weren't in time. Competition among liquidation bots for the same opportunity is itself a notable source of MEV (see Kaavon's "Maximal Extractable Value" glossary definition) activity.

Examples

Multiple competing liquidation bots might race to be the first to submit a liquidation transaction the moment a position crosses its liquidation threshold, since only the first successful bot earns the liquidation reward.
A lending protocol relying on too few active liquidation bots risks accumulating bad debt if positions aren't liquidated promptly enough during periods of network congestion.