How Fluid DEX made Fluid the safest Money Market during the largest liquidation event in history

Summary

• Fluid smoothly processed liquidation during the largest liquidation event in history saving millions of dollars for the users
• Fluid is the only lending market that has active protection against a liquidity crunch scenario
• Fluid DEX makes Fluid Lending market safer and better for users

Context

Last week started with the largest liquidation in history and Fluid once again proved its resilience by smoothly processing liquidations while having the highest Liquidation Thresholds on the market - up to 97% and lowest Liquidation Penalties - as low as 0.1%.

What are the main threats to the lending market during a liquidation event?

1. Bad debt because liquidations were not performed
2. 100% utilization on the asset that has to be liquidated

I covered how liquidations are working on Fluid and saving millions of dollars for the users during the August crash when ETH went down 16% in 4 minutes.

But Fluid, like any other lending market that rehypothecates assets, did not have a proper safety mechanism against a liquidity crunch. To give you more context, liquidators are seizing up the collateral and repaying a debt to perform a liquidation. If the collateral that has to be liquidated is fully borrowed out, then liquidation can not happen and the protocol receives a bad debt.

The introduction of Fluid DEX changed it

In case of a sudden market crash, the market is selling ETH for USDC. This means that the LPs of the DEX protocol get ETH and give USDC to traders, increasing ETH liquidity in the protocol, thereby increasing ETH liquidity in overall Fluid — hence doing the opposite of liquidity crunch.

If the market is trending upward, the opposite is true. Liquidations will move closer to pairs like USDC collateral and ETH debt. In this market surge, more USDC will move into Fluid, while ETH will exit, thereby increasing USDC liquidity for seamless liquidation.

Fluid is the only lending market in the space that has active protection against liquidity crunch. The other lending markets have passive protection in the form of high borrowing APR when the utilization becomes high (which is not effective when the market is flash crashing).

Fluid Lending market initially powered Fluid DEX, now Fluid DEX is bringing benefits to Fluid DEX by ensuring that there is always available liquidity for liquidations and making the money market 10x more efficient.

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