The value of cryptocurrency loans is soaring, providing a potential wake-up call for crypto markets amid post-election investor optimism.
“High-risk” decentralized finance (DeFi) lending has skyrocketed since the US presidential election, according to data shared by IntoTheBlock in a November 6 article.
High-risk DeFi loans are collateralized by volatile assets that are within 5% of their liquidation threshold, and they are often used by investors to capitalize on potential price volatility.
High-risk DeFi loans. Source: In the block
Although mass liquidations of high-risk DeFi loans may have an effect on the broader cryptocurrency market, they will not necessarily depress cryptocurrency prices, according to Alexander Sudeykin, co-founder of Evaa Protocol, the first decentralized lending protocol on The Open Network (TON).
Sudeykin told Cointelegraph:
“However, I don’t believe the worst-case impact could be that great. In recent years, DeFi has matured significantly, especially among major protocols that have adopted strong risk management practices.
Although decentralized loans are easier to access than traditional bank loans, they carry higher risks due to their oversized nature and the potential volatility of the assets used as collateral.
Liquidation of Michael Egorov. Source: Arkham Secret Service
Illustrating the risks, Curve Finance founder Michael Egorov was liquidated over $100 million worth of DeFi loans across multiple accounts in June. The massive liquidations were partly caused by a June 13 hack attempt that caused Curve’s token (CRV) to fall by 28%.
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The DeFi industry is more resilient to liquidations
Although a wave of DeFi loan liquidations could fuel volatility in the underlying assets, it is unlikely to trigger a major market correction, according to some commentators. The maturity of the DeFi industry could help stabilize it in the face of sharp downturns, Sudeykin said:
“This increased resilience could help mitigate the effects of any drastic downturn. For example, we have implemented maximum asset caps, isolated pools and other measures to mitigate these risks. Therefore, even though the increase in subprime lending may not necessarily have a significant impact on the crypto market in the short term.
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High-risk DeFi loans on October 16, USD chart. Source: In the block
High-risk DeFi loans reached a two-year high of over $5 million on October 16, a level last seen in July 2022, according to data from IntoTheBlock.
At the time of publication, Benqi Lending Protocol alone accounted for nearly $5 million in high-risk loans.
Benqi high-risk loans close to $5 million. Source: In the block
Benqi Protocol had issued total debt worth over $115 million, of which only $5 million was considered “high risk” at the time of publication.
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