Skip to article
Degrees of SatoshiFollow the connections.
SearchTrace an address
Degrees of Satoshi/ Encyclopedia

Encyclopedia DeFi · Entry 159

Liquidation bonuses: who receives the discount?

AI-assisted research · separate automated verificationCorrections

Theme
DeFi
Sources
4 cited records
Reading time
About 3 minutes
Automated verification
Substantive update
In this article

At a glance

Key facts

Key facts for Liquidation bonuses: who receives the discount?
FactDetailSource
MechanismThe liquidator repays debt and receives collateral under the liquidation calculation.[1]
IncentiveThe collateral amount can include a liquidation bonus.[1]
ScopeReserve risk parameters vary across markets and over time.[2]
01

Measure the borrower’s collateral cost

With hypothetical parameters and no protocol fee, repaying $100 of debt with a 5% bonus would entitle the liquidator to $105 of collateral at the calculation’s prices. The borrower loses more collateral value than the debt reduction.

This example omits rounding, limits and price movement. It explains the bonus rather than reproducing a particular live liquidation.

02

A bonus is not guaranteed liquidator profit

The liquidator still faces transaction fees, sourcing the repayment asset, selling or holding collateral and possible price movement. Competition can also affect inclusion.

An oracle-valued bonus can be difficult to realize in an illiquid market. The accounting incentive and actual trade proceeds are different quantities.

03

Inspect the remaining position after execution

Liquidation may cover only part of the debt, subject to close-factor and collateral limits. The result should be computed from the actual receipt and remaining balances.

Do not assume every liquidation completely repays the loan or returns health factor above a safe level. Version-specific rules and market conditions determine the outcome.

Direct answers

Questions people ask

Is a liquidation bonus an extra interest payment to the borrower?

No. It is an incentive to the liquidator, commonly delivered through additional collateral taken as part of the liquidation.

Inspect the evidence

The answer and key facts have stable claim links. These records retain the scope and qualification when reused.

A liquidation bonus is additional collateral value a protocol offers to a liquidator who repays eligible debt. It compensates for execution and market risk under the protocol’s rules. For the borrower, it can increase collateral lost relative to debt repaid; exact bonuses, fees and close limits are market- and version-specific.

Scope: DeFi · data through 2026-10-02. Verification: verified · 2026-10-02T18:15:18.493Z.

Link to this claim
Mechanism: The liquidator repays debt and receives collateral under the liquidation calculation.

Scope: DeFi · data through 2026-10-02. Verification: verified · 2026-10-02T18:15:18.493Z.

Link to this claim
Incentive: The collateral amount can include a liquidation bonus.

Scope: DeFi · data through 2026-10-02. Verification: verified · 2026-10-02T18:15:18.493Z.

Link to this claim
Scope: Reserve risk parameters vary across markets and over time.

Scope: DeFi · data through 2026-10-02. Verification: verified · 2026-10-02T18:15:18.493Z.

Link to this claim
Revision history
  1. — First publication after primary-source research and independent automated verification.

Source register

Sources and references

Retrieval dates and locators are recorded individually.
  1. PoolAave

    Collateralization, available liquidity and liquidation operations.

    Locator: supply; withdraw; borrow; liquidationCall · Version / scope: Aave V3 documentation · Retrieved: 2026-10-02T17:03:44.834ZOpen source
  2. ReserveAave

    Reserve LTV, liquidation threshold, borrow availability, caps and rate parameters.

    Locator: Key Reserve Parameters; Dynamic Parameters and Governance · Version / scope: Aave V3 documentation · Retrieved: 2026-10-02T17:03:44.647ZOpen source
  3. Gas and feesethereum.org contributors

    Execution resource units, fee components and gas expenditure.

    Locator: What is gas?; Base fee; Priority fee · Retrieved: 2026-10-02T17:03:41.688ZOpen source
  4. Health Factor & LiquidationsAave

    Weighted-threshold health factor, changing collateral/debt values and liquidation incentives; live close-factor values are not assumed universal.

    Locator: Health Factor; Managing Health Factor; Liquidation Process · Retrieved: 2026-10-02T17:59:03.725ZOpen source
How this article was made

Research and drafting use AI assistance. A separate automated review checks claims against primary sources; no external expert or named human review is implied. Publication, substantive editing, source retrieval and verification are recorded separately. This version was independently checked by an automated reviewer on 2 October 2026.

Editorial method and corrections

Degrees of Satoshi editorial project. “Liquidation bonuses: who receives the discount?.” Published 2026-10-02; updated 2026-10-02. https://degreesofsatoshi.com/encyclopedia/liquidation-bonus/