DeFi Liquidations Leave Borrowers in Bitcoin Limbo
When borrowers in decentralized finance (DeFi) lending protocols default on their loans, the protocol's liquidators sell or transfer Bitcoin-linked tokens to repay the debt. These tokens include WBTC, tBTC, and sBTC, which are representations of BTC rather than native Bitcoin itself.
This process reduces both the borrower's debt and collateral, but may not fully cover the loan if the sale value of the collateral is insufficient. In such cases, lenders might face shortfalls, while borrowers may not receive their native BTC immediately after liquidation.
The final recovery depends on various factors, including market conditions, protocol rules, and execution prices. This means that even after a borrower's debt has been repaid, they may still need to take further steps to convert or withdraw the BTC representations they received as compensation.