Understanding the Fluid Mechanism: How to Resolve Liquidity Crises in Large-Scale Clearing Events?
Fluid is currently the only lending market that can actively prevent liquidity crises.Original Title: "How Fluid DEX made Fluid the safest Money Market during the largest liquidation event in history"
Author: DMH
Compiled by: Deep Tide TechFlow
(Original image from DMH, compiled by Deep Tide TechFlow)
Abstract
Fluid performed excellently during the largest liquidation event in history, successfully completing liquidations and saving users millions of dollars.
Fluid is currently the only lending market that can proactively respond to liquidity crises.
The design of Fluid DEX further enhances the safety and user experience of the Fluid lending market.
Background
Last week, the market experienced the largest liquidation event in history, and Fluid once again demonstrated its strong stability. During this event, Fluid successfully completed liquidation operations with the highest liquidation threshold in the market (up to 97%) and the lowest liquidation penalty (as low as 0.1%).
What are the main threats faced by the lending market during liquidation events?
Bad debts resulting from failure to liquidate in a timely manner.
The utilization rate of assets needing liquidation reaching 100%, leading to an inability to complete the liquidation.
During the market crash last August, ETH plummeted 16% in just 4 minutes, and I previously analyzed how Fluid's efficient liquidation mechanism helped users recover millions of dollars in losses.
However, like other lending markets that rehypothecate assets, Fluid previously lacked a comprehensive safety mechanism for liquidity crises. To better illustrate this, it is important to understand the basic process of liquidation: liquidators need to seize collateral and repay debts to complete the liquidation. If the collateral that needs to be liquidated has already been fully borrowed, liquidation cannot proceed, resulting in bad debts for the protocol.
How the introduction of Fluid DEX changes the situation
In the event of a sudden market crash, ETH in the market would be sold for USDC. In this scenario, liquidity providers (LPs) of the decentralized exchange (DEX) protocol would receive ETH while providing USDC to traders. This process effectively increases the liquidity of ETH within the protocol and further enhances the overall ETH liquidity of the Fluid system, thereby avoiding the emergence of a liquidity crisis.
Conversely, when the market is on an upward trend, the direction of liquidation tends to favor USDC collateral and ETH debt trading pairs. In this market environment, more USDC flows into the Fluid system while ETH flows 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 proactively guard against liquidity crises. In contrast, other lending markets can only respond to liquidity issues through passive measures (such as increasing the annual percentage rate (APR) when asset utilization rises). 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, brings significant advantages to the Fluid lending market by ensuring that there is always sufficient liquidity during liquidations. This synergy significantly enhances the operational efficiency of the capital market, increasing its efficiency by as much as 10 times.
