Self-Liquidation Is Not a Feature

Liquidation is supposed to be a market event: someone else’s capital meets your failure.

In many systems, that is not what happens. The position and the “rescuer” are the same economic actor.

What Liquidation Is Supposed to Be

• An external actor.
• Independent capital.
• Risk transfer from the underwater party to whoever steps in.
• The system returns to solvency because new money absorbed the loss.

What Actually Happens

The same position posts collateral and owes debt. It unwinds itself.

No new capital enters. No independent counterparty takes the other side of a real trade.

What Self-Liquidation Really Is

Self-liquidation behaves like an internal conversion—not a market resolution.

[ Collateral ] → [ Debt Repayment ] → [ Collateral Released ]

• Internal conversion.
• No external capital.
• No independent buyer.

Why This Matters

Real liquidation: external capital, transfer of risk.

Self-liquidation: internal conversion, balance adjustment.

Swap-like behavior: collateral → repay debt → receive collateral.

Liquidation: external capital → repay debt → receive collateral.

If it behaves like a swap, it isn’t liquidation.

The Default Behavior

Deposit. Borrow. The position weakens. Unwind using the same exposure—same collateral loop, same wallet.

If a position can fund its own liquidation, the market was never involved.

Diagram Section

Typical System

[ Collateral ]
      ↓
[ Borrow ]
      ↓
[ Position unhealthy ]
      ↓
[ Uses same asset loop ]
      ↓
[ Self-liquidates ]

No external capital enters.

DorkFi Model

[ Collateral ]
      ↓
[ Borrow ]
      ↓
[ Collateral removed ]
      ↓
[ Position unhealthy ]
      ↓
[ Requires external liquidator ]

Liquidation requires new capital.

Protocol Table

Why This Matters (Post-Table)

The split is internal vs external resolution: liquidation as accounting versus liquidation as market action.

The difference is whether liquidation is internal accounting or external action.

Practical Note

A user can always split activity across accounts. That is behavior, not the protocol’s primitive.

The design question is what the system encodes. Here the rule is: self-liquidation is not a first-class path.

The Rule

Liquidation must come from outside the position.

A Different Model

DorkFi removes collateral when it backs debt, so the position cannot fund its own unwind from the same pledged stake.

effective = max(0, total - excluded)

Collateral used is removed.

What This Changes

• Real liquidations.
• Real liquidity.
• No extraction dressed as resolution.
• Clear failure modes.

Tradeoffs

Harder liquidations. Requires willing participants. No illusion of a self-healing loop.

Closing

Liquidation is where the system meets reality.

If a position can close itself, it never touched the market.