High-risk DeFi loans have soared since the US elections, just months after Curve’s founder was liquidated for over $100 million.
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Cryptocurrency loans are soaring in value, marking a potential warning sign for crypto markets amid post-election investor optimism.
“High-risk” decentralized finance (DeFi) loans have soared following the United States presidential election, according to data shared by IntoTheBlock, in a Nov. 6 X post.
High-risk DeFi loans are collateralized by volatile assets that are within 5% of their liquidation threshold, and they are often used by investors to capitalize on potential price volatility.
While mass liquidations of high-risk DeFi loans can have an effect on the wider cryptocurrency market, it won’t necessarily tank crypto prices, according to Alexander Sudeykin, co-founder of Evaa Protocol, the first decentralized lending protocol on The Open Network (TON).
Sudeykin 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.”
While decentralized loans are easier to access compared to traditional bank loans, they carry higher risks due to their overcollateralized nature and the potential volatility of the assets used as collateral.
Illustrating the risks, Curve Finance founder Michael Egorov was liquidated for over $100 million worth of DeFi loans across multiple accounts in June. However, the mass liquidations were partly caused by a June 13 hack attempt, which caused Curve’s (CRV) token to plummet by 28%.
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The DeFi industry is more resilient to liquidations
While a wave of DeFi loan liquidations could fuel volatility in the underlying assets, it is unlikely to trigger a major market correction, according to some commentators. The DeFi industry’s maturity may help stabilize it against abrupt downturns, Sudeykin said:
“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.”
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High-risk DeFi loans reached an over two-year high of above $5 million on Oct. 16, a level last seen during July 2022, according to IntoTheBlock data.
At the time of publication, there were nearly $5 million worth of high-risk loans on the Benqi lending protocol alone.
Benqi protocol has issued over $115 million worth of total debt, of which only $5 million is considered “high-risk” at the time of publication.
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This article first appeared at Cointelegraph.com News