- Ethereum price dropped 15% in the last four days
- The coin’s price fell hard too quickly
- Lenders and receivers are at risk on DeFi
Ethereum News Today – the price of Ethereum reportedly dropped by 15% against the USD within four days (from $278 to $210). This unexpected sharp drop in the ETH price resulted in to the liquidation of nearly $3 million worth of loans on DeFi (decentralized finance) platforms.
Ethereum Dropped too Hard Quickly
On Ethereum’s DeFi platforms, users often place their ETH as loan collateral. Meaning, when the Ether price drops substantially within a short period, the ETH users must put more Ethereum as collateral if they want to maintain loans. The regarding the liquidations on MakerDAO, one popular DeFi platform:
“If your collateral value drops, you have to lock in more Ether, pay back some debt, or you risk having their CDP liquidated. Once a CDP has been liquidated, any ETH held there as collateral will be sold to pay the debts and an additional penalty fee for maintaining your collateral ratio above the 150% mark.”
Later, the price of ETH started to pullback and this reduced the collateral value that was put by users who obtain loans on DeFi platforms. This unique situation led to liquidation worth a whopping $3 million on-chain. Most of this liquidation happened on the dYdX Protocol along with Compound Finance. According to one TokenAnalyst researcher called Ankit Chiplunkar:
“In the past three days the price of ETH fell by 20% . This trend has caused a wild period for liquidations. About $3 million worth of loans have already been liquidated on-chain. And 59% of the liquidations have occurred on the dYdX Protocol. While another 40% of them happened in Compound Finance.”
Lenders and Receivers at Risk on DeFi Platforms
As a result of the decentralized state of DeFi platforms, most of the activities on the platforms are carried out based on the systems’ mechanism. If a collateral loans’ value drops as a result of a decline in the Ether price, the loan’s receiver cannot avoid liquidation. Even with the high returns, most DeFi platforms have risks for loan lenders and receivers. Whenever there is liquidation, it creates huge risks for the parties involved.
Considering the tendency of most of the major cryptos to drop or increase in valuation substantially within a short period, operations that always depend on the action of crypto prices can become vulnerable to several risks. Now that the DeFi market is crossing $1 billion, the communication between DeFi’s and users to avoid any form of liquidations and warn about the risks involved are critical, considering the long-term growth of the Ethereum network.