High-risk DeFi loans have skyrocketed since the US election, just months after Curve’s founder was liquidated for over $100 million.
The value of cryptocurrency loans is rapidly increasing, possibly signaling a cautionary trend for crypto markets amid investor optimism following the U.S. presidential election.
Data from IntoTheBlock shared in a Nov. 6 post on X shows that “high-risk” decentralized finance (DeFi) loans have surged since the election.
These loans are collateralized by highly volatile assets that are within 5% of their liquidation threshold, often used by investors seeking to profit from price fluctuations.
Mass liquidations of these high-risk DeFi loans could influence the broader crypto market, though it might not necessarily cause prices to crash.
Alexander Sudeykin, co-founder of Evaa Protocol, TON’s first decentralized lending protocol, told Cointelegraph:
“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.”
DeFi loans are easier to obtain than traditional bank loans but carry greater risks due to being overcollateralized with volatile assets.
For instance, in June, Curve Finance founder Michael Egorov saw over $100 million in DeFi loans liquidated across multiple accounts following a 28% drop in Curve’s token price after a June 13 hack attempt.
Greater Resilience in the DeFi Industry
While a wave of DeFi loan liquidations could add volatility to underlying assets, it’s unlikely to cause a major market correction, say some experts. DeFi’s maturity may help it withstand sudden downturns, according to Sudeykin:
“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.”
As of Oct. 16, high-risk DeFi loans hit a two-year high, surpassing $5 million—a level last reached in July 2022, according to IntoTheBlock.
Currently, Benqi lending protocol alone holds nearly $5 million in high-risk loans, out of a total $115 million in issued debt.
