# The Problem: Liquidations

# No protocol has properly addressed the elephant in the room of DeFi UX

“Markets can remain irrational longer than you can remain solvent”. - John Maynard Keynes

Liquidations have long been accepted as a necessary evil that help keep decentralized finance (DeFi) protocols solvent. However, in the face of selling pressure, liquidations can cascade, exacerbating selloffs, amplifying volatility, and creating unwelcome tax obligations for borrowers.

We saw liquidation cascades or known liquidation prices threaten, and even take down many ecosystem players over the past few years, especially during the industry's most vulnerable times (Saylor, FTX, Egorov all had specific, known prices below which they would become forced sellers).

This forces borrowers to compromise on one of three terms:

  1. the loan-to-value ratio (LTVs)
  2. the probability of liquidation
  3. the stability of the borrowed asset

Attempted solutions to this problem have historically involved the introduction of new risks or explicit costs to borrowers, such as centralization risk, credit risk, or the purchase of liquidation insurance.

Fortunately, traditional finance (TradFi) solved this problem a long time ago with the invention of the “prepaid variable forward” or “collar” where users agree to sell an asset within a price range some time in the distant future in exchange for an upfront cash payment.

This trade preserves exposure to the underlying asset, which not only allows borrowers to unlock larger loans, but can even help defer capital gains taxes, providing a bridge to a step-up in basis for the borrower’s estate.