How Does a Decentralized Exchange (DEX) Facilitate the Liquidation Process?
Liquidators, often automated bots, purchase the seized collateral from the stablecoin protocol at a discount and immediately sell it on a DEX for the stablecoin. This quick sale on the DEX generates the funds needed to repay the outstanding debt and cover the liquidation penalty, ensuring the stablecoin supply is reduced against the debt.
Glossar
Stablecoin Supply
Circulation ⎊ Stablecoin supply represents the total quantity of a specific stablecoin currently in existence and available for transactions, a critical metric for assessing market liquidity and potential systemic risk within the cryptocurrency ecosystem.
Decentralized Exchange (DEX)
Platform ⎊ A Decentralized Exchange, or DEX, represents a non-custodial trading platform built upon smart contracts, enabling peer-to-peer exchange of cryptocurrencies and derivatives without requiring a central intermediary to hold user funds.
Seized Collateral
Definition ⎊ Seized collateral refers to the assets automatically taken by a decentralized lending protocol from a borrower whose loan has become undercollateralized.
Stablecoin Protocol
Collateralization ⎊ Stablecoin protocols fundamentally alter traditional monetary systems by introducing a digital asset designed to maintain a stable value, typically pegged to a fiat currency like the US dollar.