Amid the bull run, retail is taking high-risk loans on DeFi protocols like Aave crypto. Are there lessons from Curve Finance and Michael Egorov?
DeFi tokens like Aave and others like Bitcoin
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are rallying, confirming the “uptober” lore and the usually favorable Q4 2024.
As Bitcoin soars to fresh all-time highs, lifting sentiment and altcoins, something else is happening in the DeFi world.
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Spike In DeFi High-Risk Loans On Aave, Lending Protocols
According to blockchain intelligence firm IntoTheBlock, folks are overleveraging their assets and stacking “high-risk” loans on platforms like Aave and other top lending protocols.
IntoTheBlock analysts show that high-risk loans on Aave crypto, the world’s largest decentralized money market, soared to over $20 billion.
Although it is lower, shrinking from roughly $23 billion, the trend has been upward since the beginning of the year.
Bears flew in after Ethereum prices
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soared to as high as $4,100 in March, forcing the coin toward the $2,100 level in August.
(ETHUSDT)
However, there is a divergence between price action (trending lower) and high-risk loans.
From May 2024, more folks took high-risk loans from May to November before cooling off to the $20 billion zone.
While it is a reduction, the amount of high-risk loans is over 5X over the last six months.
This “flurry” suggests that users are willing to borrow more, coming close to the 5% liquidation set by Aave and other lending protocols, hoping to rally prices to provide a cushion.
In decentralized over-collateralized loan platforms, any borrower must not only provide collateral before taking loans, but the item staked must be way more valuable than the amount borrowed.
For instance, a $1000 loan borrowed on Aave may require the borrower to stake at least $1,300 worth of collateral, such as ETH, wBTC, and any other supported asset.
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Learning From Curve: Assessing Risks Of Aave Crypto Loan Surge
Overall, analysts usually track which assets whales use as collateral. If ETH is used to borrow millions, it suggests that the underlying whale expects prices to track higher, raking in free capital gains once the loan is repaid.
With the margin narrowing and perilously close to liquidation thresholds, these lending protocols likely liquidate the collateral, impacting DeFi. Often, if millions worth of the collateral is sold, that specific token may tank as a result.
The case of Michael Egorov, the founder of Curve, provides an example.
Taking advantage of his huge CRV stash, the founder borrowed over $170 million of stablecoins using Curve’s governance token as collateral across multiple protocols, including Uwu Lend.
(Source)
However, the party ended when the stablecoin DEX Curve was hacked in July 2023. Not only did CRV prices fall sharply, but because the token was used to back millions worth of loans, he was forced to sell to prevent liquidation.
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…Michael Egorov has sold a total of 39.25M $CRV via OTC and received 15.8M $USDT.https://t.co/hQBlW5WG6J pic.twitter.com/NMIQ2p05ZL
— Lookonchain (@lookonchain) August 1, 2023
The more Egorov sold, the faster CRV prices fell. By the time of the hack, the founder was selling, and the deteriorating DeFi sentiment had caused the token to fall -40%. Prices dropped to around $0.23 from the end of July to mid-October 2023.
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