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  1. INTRODUCTION
  2. FAQ
  3. Collateral & liquidation mechanism
Theoretically, bad debt could occur if collateral prices fall faster than liquidation mechanisms can react or if markets become temporarily illiquid. In practice, this scenario has been extremely rare on the integrated protocols (Aave, Morpho, Maker), each maintaining a record of zero or near-zero bad debt after billions of dollars of loans. Mitigations include:
  • Conservative collateral ratios (120-150%) to provide a safety buffer.
  • Real-time price feeds from decentralised oracles (e.g. Chainlink) updating every few seconds.
  • Distributed liquidator network with automated bots competing to execute liquidations instantly.
  • Continuous protocol risk monitoring by Byzantine Prime and partner asset managers.
As a result, even in extreme volatility, losses to lenders have historically been limited to fractions of a percent, and typically recovered through liquidation profits or insurance coverage. PreviousHow does the liquidation mechanism function exactly?NextLiquidity & redemption
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