Borrowing demand on decentralized finance (DeFi) protocols has fallen sharply following recent cryptocurrency market volatility, a sign of massive deleveraging as crypto investors unwind risky positions.
The average yield on U.S. dollar stablecoins, or the yield that protocols pay lenders who lend their assets, fell to 2.8% on Tuesday, the lowest in a year, as measured by DeFi yield app vaults.fyi’s benchmark. That’s well below the average dollar money market rate in traditional markets, which is 4.3%, and down sharply from the crypto market peak in mid-December, when DeFi rates topped 18%.
“This is primarily due to the market moving toward a risk-off environment, with cross-protocol borrowing and lending significantly reduced,” said Ryan Rodenbaugh, CEO of Wallfacer Labs, the team behind vaults.fyi.
The move reflects widespread risk aversion in the cryptocurrency market, with investors withdrawing leverage amid price volatility. Borrowing demand fell as users paid back loans and liquidations cleared out undercollateralized positions. Meanwhile, deposits available for lending on the protocol remained stable, according to data from vaults.fyi, meaning that the drop in borrowers’ income was spread across the same number of lenders, putting downward pressure on yields.
This was a “double whammy” for rates at remaining lenders, Rodenbaugh said.
This weekend’s crypto market crash exacerbated the sharp drop in yields and deleveraging, as major DeFi lending protocols reported a wave of liquidations amid a rapid collapse in asset prices. Bitcoin (BTC) and Ethereum’s ETH, two of the main assets used as collateral for crypto loans, fell 10%-15%, falling below $75,000 and $1,500, respectively.
Omer Goldberg, CEO of DeFi analytics firm Chaos Labs, cited on-chain data to point out that Aave, the largest decentralized lending market by total value locked (TVL), processed more than $110 million in forced liquidations during the market drop from Sunday to Monday.
Sky (formerly MakerDAO), the issuer of the $7 billion USDS stablecoin and one of DeFi’s largest lending platforms, also liquidated an Ethereum titan’s $74 million DAI loan, which was collateralized by 67,570 ETH, worth $106 million at the time, according to on-chain data. Another large lender with 65,000 ETH as collateral scrambled to pay back part of its $66 million loan to avoid a similar fate, reducing outstanding debt to $28 million.
The total value of assets on loan on Aave fell to $10 billion on Tuesday, according to DefiLlama, a sharp drop from more than $15 billion in mid-December. Another major lending protocol, Morpho, saw a similar drop in the same period, from $2.4 billion to $1.7 billion, according to DefiLlama.
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