Standard Liquidation Processes, as seen in protocols like Aave and Compound, rely on permissionless keepers and fixed incentive mechanisms. This model excels at predictability and decentralization because the rules are transparent and execution is open to anyone. For example, Aave V3 on Ethereum mainnet has processed billions in liquidations with a predictable 5-10% liquidation bonus, creating a stable, albeit slower, safety net for the protocol.
LABS
Comparisons
MEV in Lending Liquidations vs Standard Liquidation Processes
A technical comparison of MEV-driven, competitive keeper models against traditional first-come-first-served or auction-based liquidation systems, analyzing yield opportunities, network efficiency, and systemic risks.
Chainscore © 2026
introduction
THE ANALYSIS
Introduction: The High-Stakes Race for Undercollateralized Positions
A data-driven comparison of MEV-driven liquidations and standard processes, examining speed, cost, and systemic risk for CTOs managing lending protocols.
MEV in Lending Liquidations, facilitated by searchers and bundles via Flashbots MEV-Boost, takes a different approach by maximizing extractable value through speed and arbitrage. This results in sub-second execution and often better pricing for the protocol, but introduces the trade-off of centralization risk and potential for negative externalities like sandwich attacks on other users, as analyzed in the Flashbots mev-inspect dataset.
The key trade-off: If your priority is protocol stability, predictable costs, and censorship resistance, choose the standard model. If you prioritize maximizing capital efficiency, minimizing bad debt through ultra-fast execution, and are willing to manage MEV ecosystem dependencies, then an MEV-integrated approach is superior. The decision hinges on whether you value robustness or optimal economic extraction.
tldr-summary
MEV-Auctioned Liquidations vs. Standard Priority Gas Auctions
TL;DR: Core Differentiators at a Glance
Key architectural and economic trade-offs for protocol architects designing liquidation systems.
01
MEV-Auctioned Liquidations (e.g., Aave V3, MEV-Share)
Pro: Fair Value Capture for Users. Liquidations are bundled and auctioned to searchers via protocols like SUAVE or Flashbots. A portion of the extracted value is returned to the protocol and/or the liquidated user. This matters for protocols prioritizing user fairness and treasury revenue.
02
MEV-Auctioned Liquidations
Con: Higher Latency & Complexity. The auction process adds steps (bidding, bundle construction) versus a direct transaction. This can mean slower execution (~1-2 blocks). This matters for highly volatile markets where minutes matter for bad debt containment.
03
Standard PGA Liquidations (e.g., Compound V2, MakerDAO)
Pro: Predictable, Sub-Second Speed. Liquidators compete via simple Priority Gas Auctions (PGAs), submitting transactions directly to the public mempool. The fastest bidder wins, enabling liquidations often in the same block (< 1 sec). This matters for maximizing protocol safety.
04
Standard PGA Liquidations
Con: Value Extraction & Negative Externalities. All MEV is captured by searchers, offering no direct value back to the protocol. Leads to network congestion and high gas fees for all users during volatile periods. This matters for protocols concerned with ecosystem health and user experience.
HEAD-TO-HEAD COMPARISON
Feature Comparison: MEV vs Standard Liquidations
Direct comparison of key metrics and features for liquidation mechanisms in DeFi.
| Metric | MEV-Driven Liquidations | Standard (Protocol) Liquidations |
|---|---|---|
Primary Actor | Searchers & Bots (Flashbots, bloXroute) | Protocol Itself or Permissioned Keepers |
Execution Speed | < 1 second (front of block) | ~12 seconds (next block) |
Cost to User (Liquidation Penalty) | 8-12% (includes MEV premium) | 5-10% (fixed protocol fee) |
Capital Efficiency | High (uses flash loans via Aave, Uniswap) | Low (requires pre-staked collateral) |
Max Extractable Value (MEV) | High (sandwiching, arbitrage) | Low (limited to penalty fee) |
Protocols Using | Aave, Compound (via keeper networks) | MakerDAO, Liquity |
Network Congestion Impact | High (priority fee auctions) | Low (fixed gas schedule) |
pros-cons-a
MEV Auctions vs. Standard Processes
Pros & Cons: MEV-Driven Liquidations (Keeper Competition)
Key strengths and trade-offs for protocol architects designing liquidation systems.
01
MEV-Driven: Maximized Capital Efficiency
Specific advantage: Competition among keepers (e.g., Flashbots, bloXroute) drives liquidation execution to the most efficient price, often exceeding the minimum required collateral discount. This can return more surplus to the protocol and the liquidated user.
This matters for protocols like Aave and Compound v3, where optimizing recovered value directly impacts treasury revenue and user experience during market stress.
02
MEV-Driven: Enhanced Liquidation Reliability
Specific advantage: The profit motive creates a robust, decentralized network of automated searchers. This reduces the 'liquidation bot downtime' risk, as seen in smaller chains with less MEV activity.
This matters for ensuring positions are liquidated promptly during high volatility, protecting protocol solvency. Real-time mempool monitoring by keepers provides sub-second reaction times.
03
Standard Process: Predictable & Fair Gas Costs
Specific advantage: Fixed-permission or first-come-first-serve liquidations (e.g., MakerDAO's early system) prevent gas auctions. Users face predictable transaction costs without competing against sophisticated MEV bots.
This matters for protocols prioritizing user cost certainty and avoiding the negative externalities of gas price spikes, which can congest the network for all users.
04
Standard Process: Simplified Design & Audit Surface
Specific advantage: A simpler, non-competitive liquidation logic reduces smart contract complexity and associated audit risks. There's no need to manage auction mechanics or searcher incentives.
This matters for new protocols or those on emerging L2s (e.g., Arbitrum, Optimism) where the MEV ecosystem is less mature, allowing for a more straightforward and secure initial launch.
pros-cons-b
MEV-Driven vs. First-Come, First-Served
Pros & Cons: Standard Protocol Liquidations
Key architectural trade-offs between automated MEV searcher networks and traditional on-chain liquidation systems.
01
MEV Liquidations: Capital Efficiency
Maximizes Keeper Competition: Searchers (e.g., via Flashbots SUAVE, bloXroute) bid for liquidation rights, driving incentives to cover positions at the most efficient price. This often results in higher collateral recovery rates for protocols like Aave and Compound. This matters for maximizing protocol solvency and minimizing bad debt.
~95%
Avg. Collateral Recovery
02
MEV Liquidations: Speed & Reliability
Sub-second Execution: Professional searcher bots monitor mempools and private order flows, triggering liquidations within blocks of a position becoming undercollateralized. This reduces systemic risk during volatile market events. This matters for high-TVl protocols (>$10B) where latency directly impacts solvency.
< 2 blocks
Typical Execution Latency
03
Standard Liquidations: Predictable Cost
Fixed Incentive Structure: Protocols like MakerDAO and older lending markets use a public, permissionless function with a set liquidation bonus (e.g., 5-10%). This creates predictable costs for the protocol and the user being liquidated. This matters for risk modeling and user experience, as outcomes are less variable.
04
Standard Liquidations: Simplicity & Auditability
Transparent On-Chain Logic: The liquidation logic is contained in a single, verifiable smart contract function. Any keeper can call it, reducing reliance on complex off-chain infrastructure. This matters for security auditing and protocol teams who prioritize simplicity and decentralization over peak efficiency.
05
MEV Liquidations: Negative Externalities
Extracted Value & Congestion: Searchers engage in priority gas auctions (PGAs), driving up base fees for all network users. Value that could go to the protocol or liquidated users is captured as MEV. This matters for chains like Ethereum Mainnet where network effects can create significant social cost.
$100M+
Annual MEV from Liquidations
06
Standard Liquidations: Inefficiency & Missed Slots
Suboptimal Execution: Without a competitive bidding process, liquidations may occur at stale prices or not at all if the fixed bonus doesn't cover gas costs during congestion. This can lead to increased bad debt, as seen in early Compound v2 incidents. This matters for protocols targeting maximum capital efficiency and robustness.
CHOOSE YOUR PRIORITY
Decision Framework: When to Choose Which Model
MEV-Aware Liquidation Systems for Architects
Verdict: Choose for maximizing capital efficiency and user protection in high-value, competitive environments. Strengths: MEV-aware systems (e.g., using SUAVE, Flashbots Protect, or private RPCs) capture and redistribute liquidation profits, protecting users from harmful sandwich attacks. They integrate with solvers and searcher networks (like those on Ethereum or Arbitrum) to ensure liquidations are executed at the best possible price, not just the first. This is critical for protocols with large, concentrated positions (e.g., Aave, Compound) where the MEV from a single liquidation can be substantial. Trade-offs: Introduces architectural complexity, reliance on external MEV infrastructure, and potential for centralization in the searcher network. Requires careful economic modeling of incentive splits between protocol, searchers, and users.
Standard Liquidation Processes for Architects
Verdict: Choose for simplicity, determinism, and lower operational overhead in less competitive or lower-value markets. Strengths: Standard processes (e.g., a simple keeper bot or public mempool transaction) are straightforward to implement and audit. They offer predictable, first-come-first-served execution, which is sufficient for protocols on lower-fee chains (like Polygon or Base) or with smaller average position sizes where MEV extraction is minimal. Trade-offs: Leaves significant value on the table for searchers, exposes users to harmful front-running, and can lead to suboptimal pricing if the first keeper is not the most efficient.
verdict
THE ANALYSIS
Verdict: Strategic Selection for Protocol Architects
Choosing between MEV-powered and standard liquidation engines is a foundational decision for lending protocol design, balancing efficiency against decentralization and user experience.
MEV-Powered Liquidations excel at maximizing capital efficiency and minimizing bad debt by leveraging a competitive, permissionless network of searchers. For example, protocols like Aave and Compound have integrated with systems like the Flashbots SUAVE or Chainlink Automation, where bots compete to execute liquidations within the same block, often within seconds. This hyper-efficiency is evidenced by the billions in positions liquidated on-chain with minimal residual bad debt, even during volatile events like the LUNA collapse.
Standard Liquidation Processes take a different approach by prioritizing predictable, permissioned execution and shielding users from negative externalities. This strategy results in a trade-off of potentially slower response times for greater stability and fairness. Protocols like MakerDAO with its Keepers or simpler timelock-based systems avoid the complexity and potential front-running/ sandwiching that can harm the liquidated user, ensuring a more transparent and less adversarial process, albeit at the risk of delayed action during extreme volatility.
The key trade-off: If your priority is absolute capital preservation and speed, choosing an MEV-integrated model is superior, as it harnesses competitive market forces for near-instant risk mitigation. If you prioritize user protection, protocol simplicity, and minimizing MEV extraction from your users, a well-designed standard liquidation process is the prudent choice. The decision hinges on whether you view searchers as a necessary engine for efficiency or a vector for value extraction that conflicts with user trust.
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