Liquidation Mechanism Failure occurs when an automated system designed to close undercollateralized loan positions in decentralized finance protocols malfunctions. This failure can result from oracle delays, network congestion, or smart contract bugs, preventing timely liquidations. Such events can lead to bad debt for the protocol and significant losses for lenders.
Context
Reports of liquidation mechanism failures frequently surface during periods of extreme market volatility or network stress, highlighting the fragility of certain DeFi protocols. The industry continuously works on improving the robustness of these mechanisms through better oracle integration, more efficient liquidation bots, and dynamic parameter adjustments. These failures underscore the importance of resilient system design in decentralized lending.
A Chainlink oracle glitch mispriced `wrstETH` collateral, allowing an attacker to execute a systemic under-collateralized borrowing exploit, draining $1.1M.
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