Thursday, February 2

DeFi Investors Brace for Mass Liquidations: MakerDAO and Aave Request Collateral

After the almost 40% drop in the value of cryptocurrencies in recent days, the crypto ecosystem turned its attention to the impact on the leverage that many investors use to amplify their profits. The main platforms are liquidating the guarantees that users put up to secure their loans, usually made in some stablecoin such as DAI.

On Aave, the largest DeFi protocol, liquidations reached 1,692 last Saturday. It is the highest figure since the crash at the end of May 2021, according to data from The Defiant Terminal.

For its part, MakerDAO, another of the biggest DeFi protocols, had its own maximum of 95 settlements on Friday, January 22. Like Aave, it was the highest mark since the end of May for the protocol.

While Aave’s number of settlements surpassed Maker’s, the opposite was true for the dollar value of settlements: Maker reached $118.8 million in settlements on January 21, while Aave reached its all-time high in terms of settlements. daily high of $61.13 million on January 22.

Rune Christensen, founder of Maker, expressed this weekend on Twitter that there was over $600 million worth of ETH in danger of liquidation at the time. Although that amount was not ultimately liquidated, the January 21 run represented the highest liquidation value at Maker in the last year.

This “selloff” is important because it marks a major test for DeFi functionality in a period of high stress. Although users have been shaken by last week’s liquidations, DeFi has continued to perform as planned, which is a bullish sign for its long-term usefulness.

When they borrow against their collateral on DeFi protocols like Aave and Maker, investors expose themselves to liquidations. In essence, these lending protocols allow users to borrow stablecoins, if they are willing to lock up an asset like ETH.

Thus, investors can only borrow up to a certain amount in relation to their collateral. For example, the most popular Maker vault allows users a maximum collateralization ratio of 145%, which means that users can request up to $68,966 of DAI against $100,000 of ETH before being liquidated.

Users often take out loans to “leverage” their cryptocurrency positions. To leverage ETH, a user would deposit ETH into Maker, borrow DAI against that ETH, and then trade that DAI for more ETH, essentially increasing their accumulation of the cryptocurrency in exchange for settlement risk, as well as Maker interest rates. .


Meanwhile, crashing token values ​​themselves may continue to put pressure on the space and exacerbate liquidations. Ethereum has fallen 25% in the past week to $2,401, a price level not seen by web3 enthusiasts since July, when the cryptocurrency emerged from a severe sell-off in May.

Other large Layer 1 (L1) platforms are also down – in fact, all major L1 smart contract platforms have lost a fifth of their value in the last seven days.

The exception is LUNA de Terra, which has dropped 16.9% in that period of time. Cosmos’ ATOM, which could be considered Tier 1, has also lost 8.2% for the week.


Keep reading:

► Mike Novogratz: “2022 could be the year of digital finance”

► Ethereum loses prominence in the DeFi ecosystem

► Vitalik Buterin in Argentina: “It is the largest crypto community I have seen”


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