DeFi Liquidation Risk Modeling Using Geometric Brownian Motion

Timofei Belenko and Georgii Vosorov

Papers from arXiv.org

Abstract: In this paper, we propose an analytical method to compute the collateral liquidation probability in decentralized finance (DeFi) stablecoin single-collateral lending. Our approach models the collateral exchange rate as a zero-drift geometric Brownian motion, and derives the probability of it crossing the liquidation threshold. Unlike most existing methods that rely on computationally intensive simulations such as Monte Carlo, our formula provides a lightweight, exact solution. This advancement offers a more efficient alternative for risk assessment in DeFi platforms.

Date: 2025-05, Revised 2025-10
New Economics Papers: this item is included in nep-pay and nep-rmg
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