How Does Network Congestion Affect the Liquidation Process in Decentralized Lending?
Decentralized lending protocols use liquidation mechanisms to secure loans when collateral falls below a threshold. During network congestion, the high transaction fees and slow confirmation times make it difficult for liquidators to execute their transactions promptly.
This can lead to liquidations failing or being significantly delayed, increasing the risk of bad debt for the protocol and causing cascading market instability.
Glossar
The Liquidation Process
Process ⎊ The liquidation process is the automated, irreversible sequence of events triggered when a leveraged position's collateral value falls below the minimum maintenance margin required by a derivatives or lending protocol.
High Transaction Fees
Impediment ⎊ High transaction fees represent a quantifiable drag on capital efficiency within cryptocurrency ecosystems, options markets, and financial derivatives trading, directly impacting profitability and strategic execution.
Slow Confirmation Times
Latency ⎊ In cryptocurrency, options, and derivatives markets, latency refers to the delay between initiating a transaction and its final confirmation on the relevant ledger or exchange.