In recent weeks, the borrowing demand across decentralized finance (DeFi) protocols has experienced a sharp decline, signaling a widespread deleveraging among crypto investors as they unwind risky positions. This significant downturn can be attributed to the recent upheavals in the cryptocurrency market that have left many investors wary.
The average yield on U.S. dollar stablecoins—representing the returns offered to lenders for lending out their assets—fell to a concerning 2.8% this past Tuesday, marking its lowest level in a year. This decline is particularly striking when compared to traditional market averages, which hover around 4.3% for U.S. dollar money market rates. It illustrates a drastic reduction from mid-December’s crypto market highs, when DeFi rates soared above 18%.
According to Ryan Rodenbaugh, CEO of Wallfacer Labs, the team behind vaults.fyi, the prevailing market conditions have shifted towards a risk-off environment, resulting in a notable decrease in borrowing activity across various protocols. “This is largely due to the market moving towards a risk-off environment where borrowing across protocols has decreased significantly,” Rodenbaugh stated.
This downturn reflects a broader risk-off sentiment permeating through the crypto markets, as investors pull back on leverage during these volatile times. As users begin to repay loans and liquidations address under-collateralized positions, the overall demand for borrowing diminishes. It’s worth noting that the deposits available for lending on these protocols remain stable, according to vaults.fyi data. Consequently, the declining revenue from fewer borrowers is distributed among a consistent base of lenders, which exerts downward pressure on yields.
This situation creates what Rodenbaugh describes as a “negative double-whammy” for lenders, who find themselves facing lower yields due to a shrinking borrower base.
The sharp drop in yields and the overall deleveraging trend were further exacerbated by a recent wave of turmoil in the crypto markets. Major DeFi lending protocols reported significant liquidations during this weekend’s rapid asset price declines. Notably, Bitcoin (BTC) and Ethereum (ETH)—the two primary assets commonly used as collateral for crypto loans—both experienced substantial price falls of approximately 10%-15%, dropping below $75,000 and $1,500 respectively.
Aave, recognized as the largest decentralized lending market by total value locked (TVL), processed over $110 million in forced liquidations amid the Sunday-Monday market decline, as highlighted by Omer Goldberg, CEO of DeFi analytics firm Chaos Labs, citing on-chain data.
Sky (formerly MakerDAO), the issuer of the $7 billion USDS stablecoin and another major player in the DeFi lending space, was also affected significantly; it liquidated a sizable ether whale’s loan of $74 million, which was collateralized by 67,570 ETH worth $106 million at that time. In a similar case, another lender possessing 65,000 ETH in collateral took swift action to pay off portions of their $66 million loan to avoid liquidation, successfully reducing their outstanding debt to $28 million.
The ramifications of these events have been dramatic, with the total value of borrowed assets on Aave falling to $10 billion as of Tuesday, a substantial decline from over $15 billion observed in mid-December. Morpho, another pivotal lending protocol, reported a decrease as well—from $2.4 billion to $1.7 billion during the same timeframe.
As the dust settles in the wake of this turmoil, stakeholders in the DeFi space will need to navigate a challenging landscape characterized by decreased borrowing demand and dwindling yields. The ability to adapt to these changes will be critical for both lenders and borrowers in securing their positions moving forward.
