Core DeFi Primitives From CDPs to Market Driven Liquidations

Core DeFi primitives, especially Collateralized Debt Positions and their liquidation mechanisms, form the backbone of decentralized lending protocols. At the heart of most lending protocols lies the Collateralized Debt Position, or CDP, allowing users to borrow against volatile assets while maintaining protocol solvency through strict collateral ratios and price oracles. CDPs allow users to borrow against volatile assets while maintaining protocol solvency through strict collateral ratios and price oracles.

Liquidations are executed via auctions—most commonly Dutch or English formats—by automated keepers who are incentivized to act swiftly and efficiently. When a CDP is liquidated, the collateral must be sold to recover the debt, following the mechanics of liquidation auctions and keeper systems. Market‑driven liquidations—often executed through automated keepers and dynamic auction formats—are the lifeblood of DeFi risk‑management, offering price discovery and resilience to volatility.

A Keeper is a type of automated agent that watches the blockchain for under‑collateralized CDPs and initiates the liquidation process. Partial liquidation requires more sophisticated contract logic and may need more frequent keeper intervention. Some protocols opt for a hybrid model where they first attempt partial liquidation and resort to full liquidation only when necessary.

While DeFi protocols have become more resilient, users must remain vigilant. Using reliable oracles, monitoring positions, and understanding the mechanics of liquidation auctions can help mitigate many of these risks.