Why Trust Tech Report
The decentralized lending sector has hit a new peak, with high-risk, crypto-collateralized loans rising to $55 million, the highest in over two years. This rise raises alarms about potential market volatility and liquidation risks.
Analysts warn that increased liquidations could lead to price drops and bad debts, negatively impacting lenders.
The Risk of Liquidation Cascades
Data indicates that loans nearing their liquidation price are at the highest levels since June 2022, raising concerns of market disruptions.
A key indicator to watch in lending protocols is high-risk loans. Here’s why this matters ????
High-risk loans are loans within 5% of liquidation. Spikes can lead to cascading liquidations that impact collateral value. pic.twitter.com/YV1YAGwDrG
— IntoTheBlock (@intotheblock) October 16, 2024
Crypto loans become high-risk as they approach liquidation thresholds. If collateral value drops just 5%, the loan can be forcibly liquidated, leading to cascading effects in the market.
This could trigger a chain reaction, causing a rapid downward spiral in prices and significant volatility.
Impact on Market Liquidity and Lenders
Bad debts can freeze market liquidity, increasing risks and making it hard for traders to execute transactions at stable prices. This reluctance from lenders to provide liquidity worsens market conditions.
Macro Outlook as High-Risk Crypto Loans Surge
The surge in high-risk loans reflects growing market anxiety. As liquidations approach, fear often drives traders to sell off assets, increasing market volatility.
This behavior can create a ripple effect, leading to further price declines and reduced liquidity as institutional investors pull back.
`
