With cryptocurrency markets in freefall, some traders have been taking on more aggressive strategies to liquidate, at the expense of other traders.
“In a downtrend environment, where yields are harder to access, what we are going to see is some actors utilize some more aggressive strategies, and that may not be necessarily good for the community,” said Omakase, a contributor to the Sushi decentralized exchange.
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“The environment has become more player vs player.”
Shark traders have been scouring blockchains for sensitive information on other traders, such as those with highly leveraged positions. These sharks then attack those positions, trying to force them into liquidation, thereby earning liquidation bonuses common in decentralized finance.
“Most protocols offer a 10-15% liquidation fee,” Omakase said. “Triggering enough liquidations would cause a liquidation cascade where a motivated actor could simply hold a short position in order to profit for the subsequent secondary decrease.”
Protecting the protocol
Meanwhile, some liquidators feel they are performing a necessary service. One such liquidator operates a host of bots that search blockchains for leveraged positions. Upon finding some, they make lists of all the borrowers of a particular app and scrutinize the health of these accounts. Actors must then be quick to perform once liquidation is seen to be ready.
However, the liquidator doesn’t see this action as an “attack,” instead arguing that liquidations are necessary for the lending market. “Even though no one enjoys being liquidated, it’s essential that people do get liquidated in order to make the market and protect the protocol from insolvency,” he said.
“My job as the liquidator is to protect the protocol by closing your position,” he added. “I have made a profit, you have been liquidated and your position is closed, and the protocol itself has been protected from bad debt.”
Similar strategies could have contributed to the collapse of the TerraUSD stablecoin. Sharks traders have also been taking advantage of price arbitrage causing troubles for crypto lender Celsius.
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