As a seasoned researcher with years of experience in the dynamic world of cryptocurrencies, I have witnessed both the exhilarating highs and the nerve-wracking lows that this industry can offer. The surge in high-risk DeFi loans, as reported recently, is indeed a fascinating development that warrants close attention.
The worth of cryptocurrency loans is rapidly increasing, which might be an indication of concern for the crypto market during the period of investor enthusiasm following the election.
Decentralized finance (DeFi) loans with higher risk levels have seen an increase after the U.S. presidential election, as suggested by data provided by IntoTheBlock, based on their November 6th post.
As a financial analyst, I’d describe these high-risk DeFi loans as being backed by unstable assets that hover just 5% away from the point of liquidation. These loans are popular among investors who aim to profit from the predicted fluctuations in asset prices.
According to Alexander Sudeykin, co-founder of Evaa Protocol, although large-scale liquidations of high-risk DeFi loans can impact the broader cryptocurrency market, it doesn’t automatically mean that crypto prices will plummet.
Sudeykin told CryptoMoon:
“However, I don’t believe the impact in the worst-case scenario could be that significant. In recent years, DeFi has matured considerably, especially among major protocols that have adopted strong risk management practices.”
Borrowing through decentralized platforms is more accessible than conventional banking loans, but it comes with increased risks because these loans often require more collateral and the value of the collateral can fluctuate significantly.
Demonstrating potential dangers, Michael Egorov, founder of Curve Finance, experienced a liquidation amounting to over $100 million in DeFi loans spread across various accounts during June. This massive liquidation was partially triggered by an unsuccessful hack attempt on June 13, which resulted in Curve’s (CRV) token falling sharply by 28%.
The DeFi industry is more resilient to liquidations
According to certain analysts, a surge of loan liquidations within DeFi might increase volatility in the base assets, but is not expected to lead to a significant market crash. Sudeykin posits that the maturity of the DeFi sector could help it withstand sudden drops.
“This increased resilience may help mitigate the effects of any drastic downturns. For instance, we have implemented asset maximum caps, isolated pools, and other measures to mitigate such risks. Therefore, while the rise in high-risk loans may not necessarily have a significant impact on the short-term crypto market.”
On October 16th, the value of high-risk DeFi loans surpassed $5 million, marking a peak not seen since July 2022, as indicated by data from IntoTheBlock.
As of the release date, approximately $5 million dollars’ worth of high-risk loans were present solely on the Benqi lending platform.
The Benqi protocol has distributed a total debt value exceeding $115 million, with approximately $5 million categorized as high-risk at the point of this article’s release.
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2024-11-08 13:57