The turmoil within the crypto market has triggered a drastic decline in borrowing demand across Decentralized Finance (DeFi) protocols, signaling a sweeping deleveraging as crypto investors shed risky positions. The average U.S dollar stablecoin yield, which is the return lenders earn for lending out their assets, dropped significantly to 2.8% on Tuesday, its lowest in a year, according to benchmarks provided by DeFi yield-earning application vaults.fyi. This figure falls short of the traditional markets’ average U.S. dollar money market rates of 4.3% and is a considerable tumble from the 18% peak in mid-December, during the height of the crypto market.
Ryan Rodenbaugh, CEO of Wallfacer Labs, the team behind vaults.fyi, attributes this considerable decrease to the shift towards a risk-off environment, which has significantly reduced borrowing across protocols. He further explains that as users repay loans and under-collateralized positions are cleared through liquidations, the demand for borrowing dwindles. Despite the stability of deposits available for lending on protocols, the revenue decline from borrowers, spread amongst the same number of lenders, exerts a downward pressure on yields. Rodenbaugh refers to this as a “negative double-whammy” for the remaining lenders’ rates.
The recent bloodbath in the crypto markets over the weekend further compounded the sharp decline in yields and deleveraging. Major DeFi lending protocols reported a wave of liquidations amid rapidly plummeting asset prices. Bitcoin (BTC) and Ethereum (ETH) – two assets largely used as collateral for crypto loans – recorded 10%-15% declines, falling below $75,000 and $1,500, respectively.
Aave, the largest decentralized lending market by total value locked (TVL), handled over $110 million in forced liquidations during the Sunday-Monday market decline, according to Omer Goldberg, CEO of DeFi analytics firm Chaos Labs. Similarly, Sky (formerly MakerDAO), which issued the $7 billion USDS stablecoin and is one of DeFi’s largest lending platforms, liquidated a $74 million DAI loan collateralized by 67,570 ETH, worth $106 million. Another lender who had 65,000 ETH in collateral hastily repaid portions of their $66 million loan to avert a similar fate, reducing the outstanding debt to $28 million.
Data from DefiLlama indicates that the total value of borrowed assets on Aave plummeted to $10 billion on Tuesday, down from over $15 billion in mid-December. Morpho, another key lending protocol, experienced a similar drop, with the value falling to $1.7 billion from $2.4 billion over the same period. These developments underline the volatility and inherent risks associated with the crypto market, and the urgent need for investors to navigate their decision-making with caution.
