Paper 2023/254

Mitigating Decentralized Finance Liquidations with Reversible Call Options

Kaihua Qin, Imperial College London, UC Berkeley RDI
Jens Ernstberger, Technical University of Munich, UC Berkeley RDI
Liyi Zhou, Imperial College London, UC Berkeley RDI
Philipp Jovanovic, University College London
Arthur Gervais, University College London, UC Berkeley RDI

Liquidations in DeFi are both a blessing and a curse — whereas liquidations prevent lenders from capital loss, they simultaneously lead to liquidation spirals and system-wide failures. Since most lending and borrowing protocols assume liquidations are indispensable, there is an increased interest in alternative constructions that prevent immediate systemic-failure under uncertain circumstances. In this work, we introduce reversible call options, a novel financial primitive that enables the seller of a call option to terminate it before maturity. We apply reversible call options to lending in DeFi and devise Miqado, a protocol for lending platforms to replace the liquidation mechanisms. To the best of our knowledge, Miqado is the first protocol that actively mitigates liquidations to reduce the risk of liquidation spirals. Instead of selling collateral, Miqado incentivizes external entities, so-called supporters, to top-up a borrowing position and grant the borrower additional time to rescue the debt. Our simulation shows that Miqado reduces the amount of liquidated collateral by 89.82% in a worst-case scenario.

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Publication info
Published elsewhere. Financial Cryptography and Data Security 2023
DeFiLiquidationReversible call option
Contact author(s)
kaihua qin @ imperial ac uk
2023-02-27: revised
2023-02-22: received
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      author = {Kaihua Qin and Jens Ernstberger and Liyi Zhou and Philipp Jovanovic and Arthur Gervais},
      title = {Mitigating Decentralized Finance Liquidations with Reversible Call Options},
      howpublished = {Cryptology ePrint Archive, Paper 2023/254},
      year = {2023},
      note = {\url{}},
      url = {}
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