Dubai, UAE, 22nd November 2023, The Flash Trade protocol is a decentralized trading protocol involving four essential participants, each with specific roles. These participants are known as resolvers, workers, liquidators, and users.
In this post, we will focus on the role of liquidators. Who are they, what is their place in the swapping process, and what motivates them to perform their duties?
Liquidators & Decentralized Liquidation System
Liquidators are crucial in ensuring the fairness and timely completion of transactions within the Flash Trade protocol. Long execution periods and expired orders are two widespread blockchain issues that keep crypto from becoming a more reliable tool, suitable, for example, for on-the-go payments. When a trade expires for any reason, users usually have to remake it again. Considering the volatility of the crypto market, such a process can be truly frustrating and time-consuming. Moreover, it can be loss-making when an expired order means losing an advantageous trading opportunity.
Flash Trade was designed to enable users to trade crypto almost instantly, eliminating such issues. It operates by having professional resolvers (market makers) compete for orders, prompting them to fill them as quickly as possible. However, some resolvers may fail nonetheless. To ensure that all orders get filled and filled in a timely manner, Kinetex created the in-built liquidation system. The liquidation process is automatically triggered if a resolver takes a user’s funds but fails to execute the order. In such cases, liquidators can intervene and complete the outstanding order.
The Kinetex protocol is unique in that it is entirely decentralized and uses Zk-based liquidation to avoid having a single point of control. Decentralization was achieved by designing the liquidation system to be open and public so that anyone could become a liquidator and help maintain the security and integrity of the Kinetex system.
Liquidation Process & Its Security
Unlike in the case of resolvers (read more about them in this post), a potential liquidator does not need to make a deposit to show their commitment. The liquidation system works so that liquidators do not have a chance to do their job poorly or hurt the system.
There are two ways liquidators can fill expired orders. Firstly, they can transfer the crypto assets the user is waiting for and receive a reward, namely the failed resolver’s collateral. Alternatively, the liquidator can fill the order in one transaction using flash loans when the resolver’s collateral is in a token from the same network where the user awaits tokens. A flash loan is a DeFi feature that allows crypto users, in this case, liquidators, to borrow assets without any collateral as long as the borrowed assets are returned within the same transaction. Flash loans enable liquidators to complete the liquidation process more efficiently without additional trades. Both ways are completely safe for users and liquidators themselves.
Furthermore, Kinetex uses ZK proofs in Flash Trade to ensure that only liquidators who have filled transactions receive collateral deposited by resolvers. Liquidators use Zk proofs to confirm that they indeed completed orders and claim the resolvers’ collateral before being rewarded.
As liquidators work alongside many other liquidators, they must act fast (sometimes making decisions in a matter of seconds) to be the first to complete an expired order. Such a rewarding model enhances competition between liquidators, motivating them to act as quickly as possible, thereby enhancing the stability and security of the system.
Additionally, liquidators are motivated by arbitrage opportunities. Suppose a user wants to swap 3990 on the Gnosis network for 2 ETH on the Ethereum network, and a resolver puts 4000 USDT tokens as collateral. If the resolver, for some reason, fails to complete the transaction within the given time, a liquidator can step in and take 4000 USDT at the price of 2 ETH by sending ETH to the user who initiated the swap.
As a result, Kinetex can maintain the security of the swap process, liquidators can profit by completing unfilled trades, and users can expect quick and efficient fulfillment of their orders.
Final Thoughts
Flash Trade, Kinetex’s latest innovation, will offer users a highly secure and efficient environment for conducting swaps, and liquidation will contribute to that enormously. Overcollateralizing each transaction incentivizes liquidators to compete for liquidations and execute them as rapidly as possible, enabling users to stop worrying about delays or technical issues and focus on all the possibilities the DeFi industry provides instead. Consequently, Kinetex improves the system’s reliability and overall security while enhancing the attractiveness of cross-chain swaps to a broader mass of users, whether seasoned traders or beginners.
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Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No Funds Spectrum journalist was involved in the writing and production of this article.