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What Is the Function of a ‘Backstop Liquidity’ Facility in a DeFi Lending Protocol?

A pre-funded pool of stable capital that covers any shortfall in collateral after a liquidation event, ensuring protocol solvency.
Greeks.Live12.11.25

What Is the Function of a ‘Backstop Liquidity’ Facility in a DeFi Lending Protocol?

A backstop liquidity facility is a pre-funded pool of capital, often stablecoins, that is activated to cover shortfalls in collateral after a large or rapid liquidation event. It acts as a final layer of defense, ensuring that the protocol remains solvent and lenders can withdraw their funds, even if the liquidation process failed to fully cover the bad debt.

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