In a healthy market, liquidations keep lending protocols solvent. If they fail, the losses land on depositors.

Liquidations depend on outside actors, the keepers and bots that repay an underwater position’s debt and take its collateral at a discount. That system can break down in a few ways.

When the network is congested and gas spikes, bots can’t get their transactions through in time. When prices gap down faster than positions can be unwound, collateral sells for less than the debt and leaves bad debt behind. When liquidity dries up or a market freezes, there may be no buyer at any sensible price. Each failure ends up the same, with the protocol absorbing a shortfall that gets passed on to depositors.