The demand for borrowing within decentralized finance (DeFi) platforms has experienced a dramatic decline following the recent upheaval in the cryptocurrency market, indicating a significant trend of deleveraging as investors are retracting from high-risk positions.
On Tuesday, the average yield on U.S. dollar-pegged stablecoins, which denotes what lenders receive for allowing others to use their funds, dropped to 2.8%, marking its lowest point in a year, according to a benchmark maintained by a DeFi yield analytics platform. This rate is considerably lower than the average U.S. dollar money market rate in traditional finance (4.3%) and represents a significant drop from the mid-December cryptocurrency market highs, when DeFi yields reached over 18%.
“The significant downturn is primarily due to market sentiment shifting towards a risk-averse approach, leading to a considerable reduction in borrowing activities across various protocols,” stated the CEO of a prominent DeFi analysis company.
This shift mirrors a broader risk-off attitude in the cryptocurrency marketplace, with many investors opting to reduce leverage in the face of fluctuating prices. As users pay back loans and mitigate under-collateralized positions through liquidations, borrowing needs fall. Notably, data shows that while the amounts available for lending on protocols have remained steady, the declining revenue from borrowers now has to be distributed among the same pool of lenders, which in turn puts downward pressure on yields.
This situation creates a “negative double-whammy” effect for the rates that the remaining lenders receive, according to the CEO.
The steep drop in yields and the ongoing deleveraging was further intensified by the recent market carnage over the weekend. Major DeFi lending platforms reported significant liquidations triggered by sharp declines in asset prices. Bitcoin and Ethereum—the two primary assets typically utilized as collateral for crypto loans—witnessed drops of 10% to 15%, falling below $75,000 and $1,500, respectively.
Aave, the leading decentralized lending platform by total value locked, experienced over $110 million in forced liquidations during the Sunday to Monday market slump, as highlighted by an executive from a DeFi analytics firm, who referenced on-chain data.
Sky, a key player in the DeFi space and issuer of the $7 billion USDS stablecoin, also liquidated a substantial loan of $74 million backed by 67,570 ETH—valued at $106 million at that time. Furthermore, another significant lender was compelled to reduce their outstanding debt from $66 million down to $28 million to avert a similar liquidation.
As of Tuesday, the total value of borrowed assets on Aave had fallen to $10 billion, a steep decline from over $15 billion recorded in mid-December. Another major lending protocol, Morpho, saw its borrowed assets diminish from $2.4 billion to $1.7 billion within the same timeframe.