  The trustless nature of permissionless blockchains renders
overcollateralization a key safety component relied upon by decentralized
finance (DeFi) protocols. Nonetheless, factors such as price volatility may
undermine this mechanism. In order to protect protocols from suffering losses,
undercollateralized positions can be liquidated. In this paper, we present the
first in-depth empirical analysis of liquidations on protocols for loanable
funds (PLFs). We examine Compound, one of the most widely used PLFs, for a
period starting from its conception to September 2020. We analyze participants'
behavior and risk-appetite in particular, to elucidate recent developments in
the dynamics of the protocol. Furthermore, we assess how this has changed with
a modification in Compound's incentive structure and show that variations of
only 3% in an asset's dollar price can result in over 10m USD becoming
liquidable. To further understand the implications of this, we investigate the
efficiency of liquidators. We find that liquidators' efficiency has improved
significantly over time, with currently over 70% of liquidable positions being
immediately liquidated. Lastly, we provide a discussion on how a false sense of
security fostered by a misconception of the stability of non-custodial
stablecoins, increases the overall liquidation risk faced by Compound
participants.
