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2022 has certainly had an exciting start. Crypto market cap is down 25%+ YTD with many tokens losing 40-70% of their value over the last week alone.
Putting aside both hope and despair, it’s interesting to see how DeFi fared in such an environment of daily stress tests.
With tens of billions of dollars of leverage across segregated chains and lending pools, it’s easy to get concerned about the stability of DeFi platforms in bear market times. We previously wrote about liquidators - the vital ecosystem participants serving as (decentralised) lenders of last resort.
Maker - the platform behind DAI stablecoin - had to auction off $142mn of bad debt almost overnight.
Rari - a permissionless lending protocol - went through a wave of liquidations:
Another interesting case study is Liquity - a platform behind the LUSD stablecoin, which allows its users to lever up on ETH. Its borrowers were forced to repay $150mn+ in one day!
Some of them repaid it voluntarily, some were forced into a margin call. While many leveraged traders / investors lost a lot of money, the protocols themselves survived, ended up being fully solvent and functioning as designed. In fact, the LUSD stablecoin even broke its peg to trade above 1 USD as traders scrambled to source the coin to repay their loans (offering an interesting arb opportunity):
DeFi liquidation mechanism has once again proven itself to be a reliable backstop during market duress. Whether these are individual liquidation bots or protocol stability pools or arbitrageurs, the system seems to be working. Let’s see what the next crash brings!
Author is the Managing Partner of Re7 Capital - a stablecoin centric DeFi fund.