A steep market selloff, driven by President Donald Trump's introduction of tariffs against key U.S. trading partners, wiped billions off the industry’s total market capitalization. Yet some DeFi founders consider the move a bullish sign.
Despite ether dropping by at least 35% and solana around 25%, several key protocols held up against the stress test, several developers told The Block.
“The protocol’s goal is to keep position healthy, and limit pain to minimum,” Marc Zeller, founder of the largest Ethereum lending protocol, said in a direct message.
It’s not a small feat, considering these protocols deal with billions of dollars worth of locked or borrowed assets. For instance, Sky, the overcollateralized stablecoin protocol formerly known as Maker, maintains over $10 billion in overcollateralized assets for its $6.7 billion in circulating USDS tokens.
“It's great to see how well it worked, outside of a few isolated incidents of frontends going down,” longtime Ethereum commentator Evan Van Ness said. “DeFi works better than TradFi in times of crisis.”
Sky saw 19 new liquidated positions, accounting for over $8 million worth of assets, according to data source Block Analitica.
“Everything went flawlessly as far as im aware,” MakerDAO founder Rune Christensen told The Block.
“We've come a long way from the days when all the Maker liquidators failed and just one was there to scoop all the assets up for free,” Van Ness said, referring to the March 2020 global markets turmoil stirred by the nascent COVID-19 crisis.
A number of founders brought up the comparison to the liquidity crisis nearly five years ago, which, although it caused pain for many traders, also represented a pivotal moment in DeFi's history because it proved that these autonomous systems could operate without bias and hold up to severe stress.
To put the situation in perspective, Aave has processed around $210 million in liquidations during the market downturn, according to risk service provider Chaos Labs. By comparison, about $263 million was liquidated on Aave V2 between December 2020 and December 2022, according to a previously published report.
“Rapid market movement led to substantial liquidation events across lending and perp markets, marking one of the largest liquidation volume days ever,” Chaos said in a status report, noting that over 80% of these liquidations happened on the Ethereum mainnet for Aave.
“What's important to highlight on top is that Aave will not force close all user position when a liquidation happens compared to other venue,” Zeller said. “Only up to half is available for liquidation reducing pain for user.”
According to Block Analytica, these liquidated positions ranged from 10s of thousands of dollars to under $100.
For many, the past days' events recalled March 2020’s "Black Thursday" when news of the COVID-19 lockdowns was being processed, leading to a 48% price drop for ETH that caused cascading liquidations across the relatively young DeFi sector. While many traders suffered losses at the time, many recall the day as a pivotal moment for DeFi because it proved these autonomous systems could operate without bias and withstand severe stress.
Zeller sees the protocol’s performance and that of many other decentralized protocols as showing the effort that has gone into designing safe platforms that simply “work.” He noted the Aave team is working to integrate Chainlink’s Smart Value Recapture solution to make liquidations more efficient and profitable for the protocol.
Additionally, while it’s currently not even known how much has been liquidated across the entire crypto scene, largely due to underreported data from centralized exchanges, it is possible to get a clear view of exactly what happened on protocols like Sky and Aave. Bybit CEO Ben Zhou suggested Monday that total crypto liquidations over the past day were in the $8 to $10 billion range.
Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. Crypto exchange Bitget is an anchor LP for Foresight Ventures. The Block continues to operate independently to deliver objective, impactful, and timely information about the crypto industry. Here are our current financial disclosures.
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