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Lending application has become the "hardest hit area" of DeFi TVL loss



The violent fluctuations in the encrypted asset market have once again confirmed the "one day in the currency circle, one year in the world" among the people in the circle. Due to the continuous decline in the broader market, the total market value of the encrypted asset market has continued to decline from the high of 3 trillion US dollars on May 11. As of May 25, this figure has shrunk to 1.7 trillion US dollars, a half-month decline of 43.33%.

The DeFi market was also hit hard in this round of sharp decline. The total locked value (TVL) of all mainstream public chains fell from an intra-month high of US$130.337 billion to US$80.034 billion, a half-month drop of 38.59%. Among them, the loss of TVL in the two sectors of decentralized exchanges and decentralized lending is the most serious, especially for lending applications, whose TVL has shrunk from a monthly high of US$42.48 billion to US$26.95 billion, a decrease of 36.56%. It was 15.53 billion U.S. dollars, setting a record for the most lost funds of all tracks.

According to industry analysis, the main reason for the substantial loss of TVL is that asset prices have shrunk. In addition, the large liquidation that occurred in the lending agreement is also quite eye-catching.

On the day of the market crash on May 19, the liquidation funds of all on-chain lending agreements reached 614 million US dollars, a record high. The 606,000 ETH owned by Sun Yuchen, the founder of Tron, was also almost liquidated due to the market crash.

The encrypted lending platform CoinLoan temporarily lowered the lender's withdrawal limit on the grounds of market conditions: On July 5th, the encrypted lending platform CoinLoan announced that it was affected by the problems of Celsius, Voyager, BlockFi and Three Arrows Capital. Assets have surged, and to ensure smooth future operations, temporary measures were introduced to reduce account withdrawal limits to balance the flow of funds and prevent liquidity-related disruptions. This temporary limit applies to the total daily withdrawals per account: each user can withdraw up to $5,000 per 24-hour period. CoinLoan said it will remove the measure when market conditions permit, and said user assets are safe. ( [2022/7/5 1:51:20]

This round of market plunge has once again exposed the systemic risks of the encrypted asset market brought about by lending and leverage. Compared with the traditional financial market, the price of encrypted assets fluctuates violently, and there is no price limit and circuit breaker mechanism. When a large amount of liquidation occurs, it is very easy to cause a series of liquidation. Jeffery Wang, head of the Americas at Amber Group, believes that if the market wants to continue to move higher, it is necessary to remove some bubbles from over-leveraged positions.

Reuters Analysis: Crypto Hedge Funds Gain Big on Borrowing Spree: Cryptocurrency hedge funds have surged this year, benefiting from a surge in deals that allow lenders and borrowers to transact without banks, according to a Reuters analysis article , and the steady rise in the price of Bitcoin. The emergence of decentralized finance (DeFi) is at the heart of crypto funds’ strong performance this year, with Vision Hill Group’s Crypto Hedge Fund Index returning 126% in 2020. [2020/10/30]

The total locked value (TVL) of DeFi, which has been increasing for a year, was finally implicated by the market plunge. According to DeBank data, the TVL of mainstream public chains dropped from US$130.337 billion on May 11 to US$80.034 billion on May 25, a half-month drop of 38.59%.

DeFi platform Compound now supports USDT lending: In a recent vote on whether to add USDT to the protocol, 797,981.28 votes were in favor of the proposal and 85,580.73 were against. It’s worth noting that while users can make and use USDT loans, the stablecoin cannot be used as collateral. (theblockcrypto)[2020/5/2]

The total locked value of DeFi fell by 38.59% in half a month

According to the statistics of Ouyi OKEx Research Institute, the loss of TVL in the two sectors of decentralized exchanges and decentralized lending is the most serious. As far as the Ethereum public chain is concerned, the highest TVL of its trading sector during the month reached 33.69 billion U.S. dollars. On May 24, this The first data fell to 19.66 billion US dollars, a drop of 41.64%; while the TVL of the lending section shrank from a high of 42.48 billion US dollars to 26.95 billion US dollars, a drop of 36.56%, and the reduction reached 15.53 billion US dollars. the most.

The violent fluctuations in market conditions have once again provided a stress test for DeFi in the development stage. Judging from the data reduction ratio, the development of DeFi is greatly affected by the encrypted asset market. The decline in the price of most assets has caused a sharp drop in TVL, and the overall market's ability to resist risks is still fragile.

CoinStats to partner with Cred to provide lending services to clients: Armenia-based cryptocurrency portfolio tracker CoinStats has selected Cred as its sole lending partner. According to a press release published on April 22, CoinStats will partner with Cred to offer lending services to its customers. Cred's lending functionality will be integrated into CoinStats' products. (CryptoGlobe)[2020/4/24]

In the sharp drop in the market, some data are worthy of attention.

According to DeBank, during the sharp drop on May 19, the cumulative daily trading volume of DEX in the market reached 21.738 billion US dollars, creating a record high. Some analysts believe that the surge in DEX trading volume is not only caused by investors’ frequent transactions under the violent market fluctuations; in the DeFi environment, many quantitative robots will also use the price difference between DEX and centralized exchanges for frequent arbitrage; in addition , After the assets in the lending agreement are liquidated, they will be sold on DEX immediately, which further increases the transaction volume.

Bitbank Launches Bitcoin Lending Service: According to CNN on June 10, the Japanese virtual currency exchange Bitbank will launch a Bitcoin lending service with the aim of increasing market liquidity and attracting more users. After the service is launched, users can borrow a minimum of 1 bitcoin for transactions. [2018/6/11]

On the same day, the number of invocations of the oracle on the chain also increased significantly, and the number of invocations in a single day exceeded 35,000, indicating that when the market fluctuated violently, the oracle was busy feeding prices.

In addition to these two data, the lending sector has received the most attention among all DeFi tracks due to the existence of a liquidation mechanism. Especially on the night of the sharp drop on May 19, more than 600,000 ETHs were almost liquidated by Justin Sun, the founder of Tron, almost setting the highest liquidation amount in history. Ethereum developer Philippe Castonguay said that with about 2 minutes left, the lending platform Liquity Protocol will liquidate Sun Yuchen’s 606,000 Ethereum, but then Sun repaid 300 million US dollars, so that the liquidation did not happen in the end.

Sun Yuchen was also obviously scared, "There was indeed a moment, like a bullet passing by my scalp, which made me break out in cold sweat. I didn't expect the needle insertion to be so fierce."

Other liquidated DeFi players were not so lucky. According to DeBank data, on May 19, the liquidation funds on the chain reached 614 million US dollars, creating a record high. You know, a year ago, the TVL of the entire DeFi ecosystem was only $813 million.

In the past, investors heard that more liquidation occurred in the futures contract market, and it is more popularly known as "liquidation". So, how does the on-chain lending protocol trigger liquidation? How does liquidation convey risk?

Currently, almost all on-chain lending protocols use over-collateralized lending. For example, users who hold BTC or ETH can pledge to lending platforms such as Compound, lend assets such as USDT, and then use the borrowed assets to carry out arbitrage activities such as mining and trading.

In this scenario, the BTC and ETH deposited by the user are collateral. Assuming that the user deposits 1 BTC into the loan agreement when the BTC is 58,000 USD, and lends 35,000 USD in stable coins, at this time, his collateral is sufficient. But if BTC falls close to $35,000, liquidation will be triggered. Then, the user's 1 BTC will be quickly sold in the trading market to repay the debt, otherwise bad debts or bad debts will occur.

According to this mechanism, taking the case of Justin Sun, if his 606,000 ETHs are liquidated, this huge amount of assets will be quickly sold off in the trading market. Even if the sale occurs on a decentralized exchange, due to the existence of market arbitrageurs, this price shock will be quickly transmitted to the centralized exchange. Shenyu, the founder of F2Pool, estimated that if Justin Sun’s assets were liquidated that day, ETH might hit $1,000.

Lending agreements mostly adopt the over-collateralization mechanism, which is still leverage in essence. Although the leverage ratio is less than 1, once the value of collateral plummets or the value of lent assets skyrockets, users will face liquidation. Especially on the Ethereum public chain, due to network congestion, it is difficult for many users to quickly repay or increase collateral when they find themselves facing liquidation. Under the violent market fluctuations, the risk of liquidation also rises sharply.

After "liquidity mining" became popular in the currency circle last year, the high APY (annualized rate of return) of various new mining assets stimulated the desire of investors. The assets lent from ordinary lending applications seem to be unable to satisfy the pursuit of high returns. For users, some leveraged mining platforms have emerged as the times require. Users can lend assets that are 3 times or even 6 times higher than the principal and go to various liquidity pools, which virtually increases the risk of being liquidated.

The fatal thing is that when a user’s collateral is liquidated, their mortgaged assets will be sold to the market immediately, causing the price market to continue to go down; in theory, the price drop will lead to other users being liquidated, forming a “serial liquidation” A similar effect led to a deep retracement of the entire market, falling into a terrible "death spiral".

Jiang Zhuoer, the founder of LeBit Mining Pool, pointed out that the essence of DeFi is unregulated and completely free finance, with various ecological layers nested, and crazy high leverage. Therefore, the "3.12" of leverage trampling will inevitably happen again and again. The thrilling scene also made the industry need to reflect on the huge risks inherent in DeFi.

In fact, not only the lending agreement in DeFi, but also the futures contract in the centralized exchange will have a similar effect. For example, after the user's long order is liquidated, it will be sold immediately in the market. Under the market conditions, if quantitative funds or robots cannot quickly eat up these sales orders, it will also cause a trampling decline and lead to a series of liquidation.

This round of market plunge has once again exposed the huge risks of borrowing and leverage. Compared with the traditional financial market, the price of encrypted assets fluctuates violently, and there is no price limit and circuit breaker mechanism. When liquidation occurs, the risk will quickly "matry dolls", resulting in a series of liquidation. Jeffery Wang, head of the Americas at Amber Group, believes it may be necessary to remove some froth from overleveraged positions if the market wants to continue higher.

It is extremely scary to think about it, and the first injection of the bubble will often go to the highly leveraged participants, until the pain gradually spreads to the entire market.


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