MakerDAO Liquidation Auctions and Keeper Arbitrage
Summary
This document explains how MakerDAO liquidates undercollateralized lending vaults. It describes how collateral value and outstanding DAI determine a vault’s health, and how Keepers can trigger auctions when collateralization falls below the asset-specific threshold. In the Dutch auction system, the asking price declines over time, allowing bidders to choose when to buy collateral. Partial bids and instant settlement can let participants recycle capital quickly.
It also outlines two Keeper opportunities: initiating or restarting auctions for an incentive, and buying auctioned collateral at a discount before trading it for DAI through an exchange. An example automated Keeper monitors auctions, estimates arbitrage, and can use a flash loan to complete the purchase and repayment in one transaction. The document gives a conceptual workflow rather than measured trading results. Profit depends on market prices, auction parameters, execution costs, and available arbitrage; it does not provide performance evidence or a detailed risk model.
Key ideas
- Keepers can trigger auctions when a vault’s collateralization falls below its liquidation threshold.
- MakerDAO’s Dutch auctions lower collateral prices over time, and LIQ2.0 supports partial bids.
- Liquidators may seek incentives for starting or restarting auctions.
- A Keeper can compare auction prices with market prices to identify potential arbitrage.
- Flash loans and instant settlement can reduce the capital needed for a liquidation purchase.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.