Liquidation Bonus Explained in Detail
Liquidation bonus rewards liquidators for repaying unhealthy debt. A liquidator repays part of a borrower's debt and receives collateral worth slightly more than the repayment.
The bonus compensates for gas, slippage, and market risk.
Smart contract example
collateral seized = repaid debt value * (1 + liquidation bonus)
Protocol fees and close factors may adjust the final amount.
Liquidation Bonus in Auditing
Liquidation bonus must be large enough to make liquidations happen, but not so large that it over-seizes collateral or creates toxic incentives.
Auditors review liquidation math at boundaries and under stress.
Red flags in code
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Bonus is applied twice.
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Basis points, wad, or ray scaling is wrong.
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Protocol fee and liquidator bonus are mixed up.
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Seized collateral can exceed the user's available collateral unexpectedly.
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Rounding lets liquidators seize too much in dust positions.
How to test or review it
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Test partial and max liquidation paths.
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Compare seized collateral value against repaid debt plus configured bonus.
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Fuzz collateral and debt token decimals.
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Test close-factor and dust boundaries.
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Mock oracle price changes during liquidation.
Keep learning this topic
Liquidation
Liquidation is a protocol action that repays or closes an undercollateralized borrow position and transfers collateral according to the protocol's rules.
Collateral Ratio
Collateral ratio is the ratio of collateral value to debt value in a lending, borrowing, or minting system.
Bad Debt
Bad debt is debt a protocol cannot fully recover from collateral, liquidations, reserves, insurance, or backstop mechanisms.
Practice this in real audit scenarios
Definitions help, but auditors need reps. SCH turns concepts like Liquidation Bonus into exploit labs, code review habits, and report-writing practice.
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