Liquidation Arbitrage
CEX / Lending
How It Works
When leveraged positions fall below maintenance margin, exchanges or lending protocols trigger liquidation — selling collateral at a discount. Liquidation arbitrageurs participate in liquidation auctions, acquiring assets below market price and immediately selling for profit. In on-chain lending (Aave, Compound), calling the liquidation function earns discounted collateral + liquidation bonus.
Suitable Platforms
Suitable platforms: on-chain lending (Aave, Compound), CEX perpetuals (Binance liquidation engine). Needs monitoring of on-chain health factors or exchange liquidation queues.
Risk Level
Risk: High. Fierce liquidation competition (especially on-chain), gas fees and MEV competition erode profits. CEX liquidation auctions have participation barriers.
Common Pitfalls
- ⚠Competition: too many on-chain liquidation bots, almost no chance for regular users
- ⚠Gas wars: multiple bidders for same liquidation = gas spikes, profit eaten
- ⚠Bonus variance: liquidation bonuses vary widely across protocols/markets
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