AAVE Liquidation Guide: How to Execute Liquidations for Profit

Understanding AAVE's Decentralized Lending Protocol

AAVE is a leading DeFi lending protocol that enables users to borrow cryptocurrencies using various digital assets as collateral. Supported collateral options include ETH, DAI, USDT, LINK, and over a dozen other tokens.

The protocol's financial health depends on the quality of its loans. When borrowers maintain sufficient collateral, the system remains stable. However, undercollateralized positions (those with a health factor below 1) create systemic risk. This is where liquidators play a crucial role by:

• Identifying risky loans
• Repaying the debt on behalf of borrowers
• Receiving 5%-15% of the collateral value as reward

👉 Learn how to maximize your liquidation profits with advanced strategies

Three Methods for Executing Liquidations

1. AAVE Web Interface
   The simplest method through the official liquidation portal
2. Smart Contract Interaction
   Directly calling the liquidationCall() function in AAVE's smart contracts
3. Automated Bots
   Building custom systems that monitor and liquidate positions programmatically

Key Requirements for Successful Liquidations

Health Factor Calculation

The health factor determines liquidation eligibility and is calculated as:

Health Factor = (Σ Collateral[i] in ETH × Liquidation Threshold[i]) / (Total Borrows in ETH + Total Fees in ETH)

Where:

• Collateral[i]: Value of each collateral asset denominated in ETH
• Liquidation Threshold[i]: Maximum loan-to-value ratio for each asset
• Total Borrows: Outstanding debt in ETH terms
• Total Fees: Accumulated interest fees in ETH

AAVE uses Chainlink's price oracle system for accurate valuations.

Essential Liquidation Parameters

To execute a liquidation, you'll need:

• Borrower's wallet address
• Exact debt amount
• Collateral details
• Sufficient funds to repay the debt

Identifying Liquidatable Accounts

On-Chain Monitoring Approaches

1. Track AAVE protocol events (deposits, repayments, borrows)
2. Query user data via getUserReserveData() for real-time health factors

Using AAVE's API

The protocol provides liquidation data through:
https://protocol-api.aave.com/liquidations?get=proto

Executing the Liquidation Process

Smart Contract Method

Create a contract that calls:

liquidationCall(
  address collateralAsset,
  address debtAsset,
  address user,
  uint256 debtToCover,
  bool receiveAToken
)

Web3.js Implementation Example

// Import required ABIs
import LendingPoolABI from "./LendingPool.json";

// Initialize contract
const lpContract = new web3.eth.Contract(LendingPoolABI, lpAddress);

// Execute liquidation
await lpContract.methods.liquidationCall(
  collateralAddress,
  debtAddress,
  userAddress,
  debtAmount,
  receiveATokens
).send();

Building an Efficient Liquidation Bot

Key considerations for automation:

1. Capital Requirements
   Ensure sufficient funds to cover debts and gas costs
2. Profitability Analysis
   Calculate potential rewards minus gas fees
3. Protocol Version
   Always interact with the latest AAVE contracts
4. Risk Management
   Implement safeguards against system failures

👉 Discover professional-grade liquidation bot configurations

Profit Calculation Formula

1. Determine collateral details and reward percentage
2. Calculate collateral's ETH value using oracle prices
3. Compute maximum reward: Collateral Value × Reward Percentage
4. Subtract gas costs from potential earnings

Reward percentages vary by asset type:

• Stablecoins: Typically 5-8%
• Volatile assets: Up to 15%

Frequently Asked Questions

What's the minimum health factor for liquidation?

Any position below 1.0 becomes eligible for liquidation.

How often should I check for liquidatable positions?

For optimal results, monitor continuously or at least every few minutes.

Can I liquidate multiple positions simultaneously?

Yes, but each requires a separate transaction with sufficient gas.

What happens if multiple liquidators target the same position?

AAVE processes transactions on a first-come, first-served basis.

How do gas prices affect liquidation profitability?

High network congestion can significantly reduce profit margins.

Where can I find current liquidation reward percentages?

Refer to AAVE's official risk parameters documentation.

Disclaimer: This guide represents educational content only. Always conduct your own research before engaging in liquidation activities.