AAVE v2 Liquidation Returns, Gas Costs, and Loan Size
Summary
The report explains how AAVE v2 liquidators repay part of an undercollateralized loan and receive collateral with a protocol bonus. It examines stablecoin debt backed by ETH from 2021 to 2023, relating liquidation activity to ETH price drops and volatility. It estimates returns from nearby minute-level prices and finds measured gross returns cluster around the stated 5% bonus, while acknowledging that timing imprecision creates variation.
After transaction costs, the reported mean return falls to 2%, and 19% of liquidations lose money. The analysis of liquidator records finds profits concentrated among the top 10% and suggests larger loans can better absorb gas costs than small ones. These observations describe historical AAVE v2 activity, not a guaranteed or risk-free strategy: gas, competition, execution infrastructure, changing protocol conditions, and limited liquidation opportunities affect results. The report suggests extending analysis to other assets and lending protocols but does not test those extensions.
Key ideas
- AAVE liquidations repay part of unhealthy loans in exchange for collateral and a protocol bonus.
- ETH price declines and higher volatility coincide with clusters of liquidations in the historical sample.
- Minute-level price approximations make measured returns vary around the nominal collateral bonus.
- Gas costs reduce average profitability and can make individual liquidations unprofitable.
- Larger loans may offer better net economics because gas costs weigh more heavily on small transactions.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.