Originally published on: November 08, 2024
The cryptocurrency landscape is witnessing a significant uptick in the value of decentralized finance (DeFi) loans, serving as a potential cautionary signal for investors amidst the post-election market optimism.
Recent data from IntoTheBlock reveals a notable increase in “high-risk” DeFi loans following the US presidential election. These loans, which are collateralized by volatile assets close to their liquidation threshold, are favored by investors looking to leverage potential price swings in the market.
While the rise in high-risk DeFi loans could impact the broader crypto market, experts like Alexander Sudeykin, the co-founder of Evaa Protocol, believe that mass liquidations may not necessarily lead to a steep decline in crypto prices. Due to the overcollateralized nature of decentralized loans and the volatility of underlying assets, high-risk DeFi loans carry elevated risks compared to traditional bank loans.
As illustrated by the case of Curve Finance founder Michael Egorov, who faced liquidation of over $100 million in DeFi loans earlier this year, the susceptibility of these loans to market fluctuations is evident. Egorov’s liquidation stemmed from a hack attempt on June 13, causing Curve’s CRV token to plummet.
Despite the potential for volatility, the DeFi industry’s growing maturity could help mitigate sudden downturns, according to industry commentators. Recent data from IntoTheBlock shows that high-risk DeFi loans reached a peak of over $5 million on Oct. 16, marking the highest level in over two years.
At present, the Benqi lending protocol alone accounts for nearly $5 million in high-risk loans out of a total debt issuance of over $115 million. This trend underscores the increasing popularity of high-risk DeFi loans in the current market landscape.
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