Key takeaways
-
Trump’s crypto advisor warned of looming DeFi lending crisis.
-
David Bailey highlighted recent protocol stalls and implosions.
-
The DeFi market experienced its worst week in years, marked by exploits, stablecoin withdrawal and liquidity crises.
It’s been a brutal week for decentralized finance (DeFi) – and according to one of Donald Trump’s top crypto advisors, the pain may just be beginning.
David Bailey, president of Bitcoin Magazine and a key figure in shaping Trump’s crypto policy, warned on
Bailey’s warning comes as DeFi reels from a series of hacks, protocol implosions and stablecoin depegs that have collectively wiped out billions in market value and shaken investor confidence.
Bailey said the situation unfolding in DeFi lending markets is eerily familiar.
He warned that if the crisis worsens, it could spread beyond decentralized platforms and infect centralized markets as well.
“It is very plausible that we could see an October 10 runoff,” Bailey wrote. “I hope this doesn’t happen, but stay safe and avoid counterparty risk.”
When users asked how such contagion could spread, Bailey explained that market makers could easily become trapped if lending protocols freeze collateral or margin calls fail to clear.
“If I’m a market maker and an element of my strategy has just been frozen in a loan protocol, I’m not hedged and I’m not liquid,” he added, “without liquidity it’s difficult to self-liquidate the collateral without exposing the exchange to bad debt.”
The warning echoes the 2022 lending crisis that followed the collapse of Terra Luna – a contagion that brought down hedge funds and lenders like Celsius and Voyager, wiping out billions in leveraged crypto exposures.
Bailey’s remarks come during what analysts are calling one of the darkest periods in DeFi since the last bear market.
In the span of a week, two major protocols were hacked, another imploded internally, and several decentralized stablecoins lost their dollar peg.
Balancer, one of DeFi’s most established protocols, was hacked for over $100 million after a smart contract exploit.
Stream Finance has frozen deposits and withdrawals after a $96 million loss linked to an external asset manager.
At least three decentralized stablecoins – xUSD, deUSD and USDX – have been deindexed by 50% to 95%, drawing strange parallels with the Terra Luna disaster of 2021.
