Liquidations are a pain for Defiers, but a new tool aims to prevent them automatically.
Decentralized bot network, Gelato Network, released a user interface yesterday which will automatically pay down users’ debt on lending platform Aave if they are close to liquidation.
The interface, called Cono Finance, does this by selling some of a user’s highest value collateral, exchanging it for the debt tokens owed to Aave, and then repaying the lending platform. This brings a user’s collateral-to-debt ratio down within a range specified by the user. This range is called the Wanted Health Factor.
And all this is built to lower the probability of liquidation.
DeFi users are rightly concerned about liquidations. Liquidations happen when user’s collateral-to-debt ratio falls below a given level. At that point, liquidators can buy their collateral at discounted prices, meaning users lose their crypto and get paid less than they’d normally get for it.
Automation for UX
This isn’t the first liquidation prevention tool Gelato has built. In February, the protocol launched an auto-refinance tool with DeFi dashboard Instadapp.
But other than that, there are few products in the space targeting this problem.
“Front-ends such as Cono Finance and Sorbet Finance showcase to developers how automation can superpower user experiences,” said David Liebowitz, head of growth at Gelato.
Sorbet Finance is another Gelato product that uses smart contract automation to facilitate limit orders. Limit orders allow traders to specify prices at which to buy or sell an asset, granting greater control for entering and exiting positions.
Good for the Industry
Liquidation prevention isn’t just a positive for users, though.
Liquidations exist because DeFi protocols need them to maintain financial health. DeFi lenders don’t want to be caught with bad debt, so they incentivize liquidators through discounts to buy users’ collateral before the value of the debt exceeds that of the collateral. Without automated rebalancing products like Cono, it takes time to manually manage the liquidation ratios by either topping up collateral or paying down debt.
Development of the new tool was funded by a $50K grant from the Aave Grants DAO and is only compatible with Polygon currently.