Bitcoin Crashes Near $20,000 – But DeFI Hasn’t Said Its Last Word, Here’s Why!

“Transparency and real-time tracking of on-chain transactions allows everyone to see liquidations and value-at-risk at these levels,” Svanevik added.

Aave, Compound see massive transactions

Svanevik pointed out that more than $6 billion has been repaid on Aave and Compound, two lending and borrowing platforms, which equates to a 64% reduction in their outstanding debt.

“That’s almost twice the reduction in TVL (total value locked) compared to the May crash of last year (-36%), and we’ve seen some very large investors redeem massive positions, including a single wallet redeeming 140K ETH on Aave after some initial on-chain liquidations last week,” he said.

These moves did not fix any unforeseen contagion damage in the crypto ecosystem, which speaks to the resilience of deFi applications that rely on smart contracts to perform financial transactions instead of centralized third parties.

Meanwhile, Svanevik said the centralized way of operations in some crypto businesses has accelerated the downturns in recent weeks: “What we are seeing is that the shadow credit system through centralized lenders has allowed a leverage and excessive risk in the system with little to no visibility for users until the hard sell began and pullback stops hit last week, reminiscent of Archegos’ margin calls last year Robinhood’s last or breakdown in 2020.”

Svanevik noted that the percentage of stablecoin holdings for wallets labeled as smart money by Nansen spiked in the past week – suggesting a sign of “aggressive de-risking” as well as repayment of loans on the chain.

“We’ve already seen signs of a decline in this ratio, indicating that smart money is rolling out again,” Svanevik concluded.

The DeFi sector, however, saw some governance drama last week within the Solana-based Solend lending protocol, as noted, with a potential issue subverted on Tuesday.

Market capitalization fell below the $1 trillion mark at the start of the month as fears of a pullback and inflation led to a slowdown in broader markets. Bitcoin experienced a nearly 12-week decline that pushed the price as far below $18,000 last week – marking the first time the asset has fallen below previous cycle highs.

A decline in cryptocurrency prices in early May caused contagion risks within the crypto ecosystem, starting with the implosion of Terra’s stablecoin UST in mid-May. The coin written in dollars fell to pennies while LUNA tokens, the flagship of the protocol, plunged almost 100%.

This knocked $28 billion off the value locked on Terra apps and led to Three Arrows Capital posting hundreds of millions of dollars in losses.

In June, cryptocurrency lender Celsius Network ran into trouble disabling user withdrawals, citing “extreme market conditions.” This led to insolvency rumors in crypto circles. Its counterparts have apparently been affected too: Lender BlockFi said this week that it had secured a $250 million credit facility from the stock Exchange of FTX cryptocurrencies in order to strengthen its “balance sheet and the strength of its platform”.

Thomas Estimbre
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