A comprehensive understanding of the Fluid mechanism: How to resolve the Liquidity crisis in a large-scale liquidation event?

Author: DMH

Compiled by DeepTechFlow

(The original image is from DMH, compiled by Shenchao TechFlow)

Summary

Fluid performed outstandingly in the largest-scale liquidation event in history, successfully completing the liquidation and saving users millions of dollars.

Fluid is currently the only lending market that can actively respond to liquidity crises.

The design of Fluid DEX further enhances the security and user experience of the Fluid borrowing and lending market.

Background

Last week, the market experienced the largest-scale liquidation event in history, and Fluid once again demonstrated its strong stability. In this event, Fluid successfully completed the liquidation operation with the highest liquidation threshold (up to 97%) and the lowest liquidation penalty (as low as 0.1%) in the market.

What are the main threats faced by the lending market in a liquidation event?

Bad debts caused by failure to settle in a timely manner.

The utilization rate of the assets to be liquidated reaches 100%, leading to the inability to complete the liquidation.

In the market crash in August last year, ETH fell by 16% in just 4 minutes. I have analyzed in detail how Fluid has recovered millions of dollars in losses for users through efficient liquidation mechanisms.

(Tweet details)

However, like other lending markets that rehypothecate assets, Fluid previously lacked a robust security mechanism for liquidity crises. To better illustrate this point, it is necessary to understand the basic process of liquidation: the liquidator needs to seize the collateral and repay the debt to complete the liquidation. If the collateral that needs to be liquidated has already been fully borrowed, the liquidation cannot proceed, leading to bad debt for the protocol.

How the introduction of Fluid DEX changes the status quo

In the event of a sudden market crash, ETH in the market will be sold for USDC. In this case, the liquidity providers (LPs) of decentralized exchange (DEX) protocols will receive ETH and provide USDC to traders. This process effectively increases the liquidity of ETH in the protocol and further enhances the overall liquidity of the Fluid system, thereby avoiding the emergence of a liquidity crisis.

Conversely, when the market is in an uptrend, the direction of liquidation will be more inclined towards the USDC collateralized and ETH debt trading pairs. In this market environment, more USDC will flow into the Fluid system, while ETH will flow out. This dynamic increases the liquidity of USDC, making the liquidation process more efficient and smooth.

Fluid is currently the only lending market that can actively prevent liquidity crises. In contrast, other lending markets can only address liquidity issues through passive measures (e.g., increasing the annual percentage rate APR when asset utilization is high). However, this passive approach often proves ineffective during sudden market crashes.

The Fluid lending market was initially supported by Fluid DEX, and now Fluid DEX, in turn, has brought significant advantages to the Fluid lending market by ensuring sufficient liquidity at the time of settlement. This synergy significantly improves the efficiency of the capital market, increasing its efficiency by more than 10 times.