Permissionless vs. Permissioned Liquidator Roles

Open participation: Any bot or user can compete to liquidate positions. This creates a robust, decentralized safety net, as seen in protocols like MakerDAO and Aave. Critical for DeFi blue-chips where uptime is non-negotiable.

Dynamic fee markets: Liquidators compete on gas and speed, driving down keeper costs for users. This leads to tighter spreads and more efficient capital recycling, a core feature of Compound and Euler.

Front-running and spam attacks: The open model is vulnerable to Maximal Extractable Value (MEV) strategies (e.g., sandwich attacks) and gas-griefing, which can increase network congestion and create a negative user experience.

Vetted operator set: Protocols like dYdX (v4) and Synthetix use allowlists to ensure reliable, accountable liquidators with Service Level Agreements (SLAs). Ideal for institutional-grade platforms requiring predictable performance.

Reduced overhead & coordination: Pre-approved liquidators can use private mempools (e.g., Flashbots SUAVE) and off-chain coordination to avoid public gas wars. This minimizes failed transactions and optimizes for capital efficiency.

Reliance on a few entities: If the curated set of keepers goes offline or colludes, the system's safety is compromised. This introduces counterparty risk and conflicts with the censorship-resistant ethos of DeFi.

Open participation: Any bot or user can compete to liquidate undercollateralized positions. This matters for decentralized protocols like Aave and Compound, ensuring liquidations are not blocked by a single entity's failure or malicious action. It creates a robust, competitive market for bad debt.

Competitive fee discovery: Liquidators bid via gas auctions, dynamically setting the liquidation incentive. This matters for protocol sustainability, as it typically results in lower average premiums paid (e.g., 5-10%) compared to fixed-rate systems, preserving more user collateral.

Guaranteed response: Whitelisted liquidators have SLAs and dedicated infrastructure, ensuring high uptime during market volatility. This matters for stablecoin protocols like MakerDAO's PSM, where failing to liquidate can directly threaten the peg.

MEV and frontrunning: The open auction model invites predatory gas wars, which can lead to network congestion and inefficient outcomes for the protocol and remaining users. Managing this requires sophisticated systems like Flashbots Protect.

Rent extraction risk: A small group of liquidators can collude to demand higher fixed premiums (e.g., 13% in Maker). This matters for protocol treasury management, as it creates a reliant oligopoly and higher, less competitive costs passed to users.

Maximized Censorship Resistance & Uptime: Anyone can submit a liquidation transaction, eliminating single points of failure. This is critical for protocols like MakerDAO and Aave where system solvency depends on reliable, 24/7 liquidation availability, especially during high volatility events.

MEV Extraction & Gas Wars: Open competition leads to priority gas auctions (PGAs), where liquidators bid up transaction fees to capture profitable positions. This results in network congestion and increased costs for end-users, as seen on Ethereum during market crashes.

Predictable Execution & Lower User Costs: A pre-approved set of actors (e.g., professional market makers like Wintermute, GSR) can coordinate off-chain, submitting liquidations without gas wars. This leads to more stable gas fees and can return a portion of profits to the protocol or users, as implemented by dYdX v4.

Centralization Risk & Liveness Failure: Reliance on a few entities creates a single point of failure. If the designated liquidators are offline, unresponsive, or collude, the protocol's solvency is at risk. This requires robust SLA monitoring and fallback mechanisms, adding operational overhead.