How to Set Up an AAVE Liquidation Bot: A Complete Guide

AAVE is a leading DeFi decentralized lending protocol that allows users to borrow against multiple crypto assets like ETH, DAI, USDT, and LINK. This guide explores how to build an automated liquidation bot to protect the protocol's financial health while earning rewards.

The Role of Liquidation in AAVE

AAVE's systemic stability depends on maintaining healthy loans. Borrowers must provide adequate collateral, and when their health factor drops below 1, liquidation occurs. Liquidation:

• Prevents systemic risk accumulation
• Offers 5%-15% rewards from seized collateral
• Can be executed manually or via automated bots

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Three Liquidation Methods

1. AAVE's Built-in Liquidation Module
   Simple UI-based approach via app.aave.com/liquidations
2. Direct Smart Contract Calls
   Programmatically call liquidationCall() method
3. Custom Liquidation Bots
   Automated systems combining monitoring and contract execution

Prerequisites for Liquidation

Key Conditions

• Health Factor < 1
  Calculated as:

  (Σ Collateral[i] in ETH × Liquidation Threshold[i]) / (Total Borrows + Fees in ETH)

• Chainlink Price Feeds
  Determines asset valuations

Target Identification

Monitor unhealthy accounts via:

• On-Chain Tracking

  // Sample monitoring logic
  aaveProtocol.events.Interaction()
    .on('data', (event) => updateUserData(event.args.user))

• AAVE's API
  protocol-api.aave.com/liquidations

Executing Liquidations

Web3.js Implementation Example

// Import ABIs
const LendingPoolABI = require('./LendingPool.json');

// Configure transaction
const lpContract = new web3.eth.Contract(LendingPoolABI, lpAddress);
await lpContract.methods.liquidationCall(
  collateralAddress,
  debtAssetAddress,
  targetUser,
  debtToCover,
  receiveATokens
).send();

👉 Optimize your bot's gas efficiency

Building Your Liquidation Bot

1. Capital Management
   Ensure sufficient funds to cover debts

2. Profitability Calculation

   Max Reward = Collateral Value × Bonus Percentage
   Net Profit = Max Reward - Gas Costs

3. System Maintenance

   • Track protocol updates
   • Implement fail-safes
   • Secure private keys

FAQ

Q: What's the typical ROI for liquidation bots?
A: Returns vary based on gas fees and collateral type, but stablecoins yield 5-8% while volatile assets offer up to 15%.

Q: How often should I update my bot?
A: Monitor AAVE's GitHub monthly for protocol changes.

Q: Which wallets work best for bots?
A: Use dedicated hot wallets with transaction automation capabilities.