The decentralized lending sector is hitting a new peak, with high-risk crypto-collateralized loans rising to $55 million, the highest in two years. This increase raises fears of market volatility and potential liquidations.
High-risk loans are those close to liquidation. If collateral value drops slightly, it can trigger forced sales, leading to a chain reaction that drives prices down. This cycle can freeze market liquidity, making trading riskier and increasing the chance of price slippage.
Impact on Market Liquidity and Lenders
Bad debts can diminish market liquidity because borrowers can’t repay loans, making it difficult for traders to execute transactions at stable prices. Lenders become cautious, reducing available capital, which exacerbates the issue.
Macro Outlook as High-Risk Crypto Loans Surge
The climb in high-risk loans signals market unease. When these loans hit liquidation levels, fear spreads, prompting traders to sell assets to avoid losses, further dragging down prices. This creates a liquidity crunch, making it harder for the market to stabilize.
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