Financial speculators often seek to increase their potential gains
with leverage. Debt is a popular form of leverage, and with over
39.88B USD of total value locked (TVL), the Decentralized Finance
(DeFi) lending markets are thriving. Debts, however, entail the risks
of liquidation, the process of selling the debt collateral at a discount
to liquidators. Nevertheless, few quantitative insights are known
about the existing liquidation mechanisms.
In this paper, to the best of our knowledge, we are the first to
study the breadth of the borrowing and lending markets of the
Ethereum DeFi ecosystem. We focus on Aave, Compound, MakerDAO, and dYdX, which collectively represent over 85% of the
lending market on Ethereum. Given extensive liquidation data measurements and insights, we systematize the prevalent liquidation
mechanisms and are the first to provide a methodology to compare
them objectively. We find that the existing liquidation designs well
incentivize liquidators but sell excessive amounts of discounted
collateral at the borrowersβ expenses. We measure various risks
that liquidation participants are exposed to and quantify the instabilities of existing lending protocols. Moreover, we propose an
optimal strategy that allows liquidators to increase their liquidation
profit, which may aggravate the loss of borrowers
