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In the decentralised finance world, liquidations are a known phenomenon, and they can occur in most DeFi protocols under certain conditions. Whilst liquidations in the Bumper protocol are rare, they can occur.
When a Maker’s loss exceeds the size of their initial deposit, a Maker will be liquidated and their position is closed. In these cases, any Bonded BUMP tokens, including incentives are retained by the liquidator.
*Note: "ExpiredProtocolFee" is the protocol fee for the period that the position was in an expired state.
Bumper attempts to compensate for imbalances by increasing premiums and offering incentives to new liquidity providers to enter the protocol, thus stabilising the system. There are a number of factors, however, which may contribute to maker liquidations:
- Market Conditions: Extreme market volatility leading to huge and sustained price drops in protected assets can lead to liquidations, particularly for those in higher risk tiers, who would be affected first.
- Massive Liquidity Imbalance: An imbalance in liquidity, exacerbated by poor market conditions, could trigger liquidations should Bumper find its capital pools under significant and sustained stress.
- Extended Expired Position: If the user does not close or renew an expired position, they are liable to pay Expired State fees, which are incrementally calculated. This may create a scenario where, particularly over an extended period of time, the additional expired state fees exceed the Maker’s deposit value and current yield.
- Higher Risk Tiers: The risk of liquidation is increased for Makers who select a higher risk tier when depositing stablecoins as higher tiers are liquidated before lower ones.