High-risk DeFi loans surge after US election as crypto market rallies

Cryptocurrency loans are soaring in value, marking a potential warning sign for crypto markets amid post-election investor optimism.

“High-risk” decentralized finance (DeFi) loans have soared since the United States presidential election, according to data shared by IntoTheBlock in a Nov. 6 X post.

High-risk DeFi loans are collateralized by volatile assets that are within 5% of their liquidation threshold, and they are often used by investors to capitalize on potential price volatility.

High-risk DeFi Loans. Source: IntoTheBlock

While mass liquidations of high-risk DeFi loans can have an effect on the wider cryptocurrency market, they won’t necessarily tank crypto prices, according to Alexander Sudeykin, co-founder of Evaa Protocol, the first decentralized lending protocol on The Open Network (TON).

Sudeykin told Cointelegraph:

“However, I don’t believe the impact in the worst-case scenario could be that significant. In recent years, DeFi has matured considerably, especially among major protocols that have adopted strong risk management practices.”

While decentralized loans are easier to access than traditional bank loans, they carry higher risks due to their overcollateralized nature and the potential volatility of the assets used as collateral.

Michael Egorov liquidation. Source: Arkham Intelligence

Illustrating the risks,  Curve Finance founder  Michael Egorov was liquidated for  over $100 million  worth of DeFi loans across multiple accounts in June. The mass liquidations were partly caused by a June 13 hack attempt that caused Curve’s ( CRV ) token to plummet by 28% .

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The DeFi industry is more resilient to liquidations

While a wave of DeFi loan liquidations could fuel volatility in the underlying assets, it is unlikely to trigger a major market correction, according to some commentators. The DeFi industry’s maturity may help stabilize it against abrupt downturns, Sudeykin said:

“This increased resilience may help mitigate the effects of any drastic downturns. For instance, we have implemented asset maximum caps, isolated pools, and other measures to mitigate such risks. Therefore, while the rise in high-risk loans may not necessarily have a significant impact on the short-term crypto market.”

Related: Two Bitcoin whales buy $142M BTC after Trump’s win

High-risk DeFi loans Oct. 16, USD chart. Source: IntoTheBlock

High-risk DeFi loans reached an over two-year high of above $5 million on Oct. 16, a level last seen during July 2022, according to IntoTheBlock data.

At the time of publication, there was almost $5 million worth of high-risk loans on the Benqi lending protocol alone.

Benqi high-risk loans near $5 million. Source: IntoTheBlock

Benqi protocol had issued over $115 million worth of total debt, of which only $5 million was considered “high-risk” at the time of publication.

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