Originally published on: November 08, 2024
In the wake of the US election, cryptocurrency loans are seeing a surge in value, raising concerns about the overall stability of the crypto market amidst post-election investor enthusiasm.
According to data from IntoTheBlock, “high-risk” decentralized finance (DeFi) loans have experienced a significant uptick following the US presidential election. These loans are backed by volatile assets that are dangerously close to their liquidation threshold, often used by investors looking to capitalize on price fluctuations.
While the mass liquidation of high-risk DeFi loans can impact the broader cryptocurrency market, it may not necessarily lead to a market crash, explains Alexander Sudeykin, co-founder of Evaa Protocol. Sudeykin emphasizes that decentralized loans, although more accessible than traditional bank loans, come with higher risks due to their overcollateralized nature and the volatility of collateral assets.
In a notable case from June, Curve Finance founder Michael Egorov faced liquidation of over $100 million in DeFi loans across multiple accounts, partly triggered by a hack attempt that caused Curve’s CRV token to plummet by 28%.
Despite the potential for increased volatility in underlying assets from a wave of DeFi loan liquidations, experts believe that the maturity of the DeFi industry may help cushion against major market corrections. Sudeykin suggests that the industry’s advancements could provide stability in the face of sudden downturns.
Recent data from IntoTheBlock shows that high-risk DeFi loans hit a two-year high exceeding $5 million on Oct. 16, marking levels unseen since July 2022. Benqi lending protocol alone had nearly $5 million in high-risk loans at the time of reporting.
With over $115 million in total debt issued on the Benqi protocol, only a fraction of it was considered “high-risk” at the time, highlighting the growing trend of risky DeFi borrowing.
As the crypto market rallies post-election, the surge in high-risk DeFi loans raises concerns about potential market disruptions. Stay informed about the latest developments in DeFi and cryptocurrency by subscribing to the Finance Redefined newsletter for expert analysis and insights delivered every Friday.
