Defaults are not liquidations, they are a choice made by the borrower
Defaults are when a user forfeits their collateral to the lender. There are two reasons to why a borrower would do this:
- 1.The borrower forgets to repay their loan by the repayment due date, they will end up defaulting all of their collateral. They keep the whole loan.
- 2.The borrower chooses to default. The borrowers collateral value may be below the value of the loan by the repayment due date (you can do this to hedge). It makes logical sense to not pay back the loan.
Please note, a borrower can repay pay a loan partially, they would then receive a partial amount of their collateral.
A protocol could lend out stablecoins for ETH if they want more exposure to ETH. By using Vendor Protocol they are setting a limit order to buy ETH from the borrowers at a predetermined price set by the lend ratio