30s Summary

The surge in so-called “risky” decentralized finance (DeFi) loans in the crypto industry since the US Election could represent a red flag for the market, with volatile assets being used as security by profit-seeking investors. Despite this, some industry figures, such as Alex Sudeykin, co-founder of Evaa Protocol, do not anticipate a crash in cryptocurrency prices. Nonetheless, decentralized loans, which are typically over-secured and volatile, can carry significant risks, as demonstrated by Curve Finance founder Michael Egorov’s loss of over $100m in DeFi loans. That said, some experts suggest the crypto loan sector has developed enough resilience to weather larger market declines.

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Loans in the cryptocurrency world are skyrocketing, signalling a potential red flag in the crypto market in the enthusiasm following the US presidential election. Known as “risky” decentralized finance or DeFi loans, these have shot up since the US election according to data shared by IntoTheBlock.

These risky loans use volatile assets as security and are generally taken by investors looking to make a profit off fluctuating prices. While a surge in the liquidation of these high-risk loans could affect the broader crypto market, Alex Sudeykin, co-founder of Evaa Protocol, doesn’t think it will necessarily cause a crash in crypto prices.

Now, although getting a decentralized loan is easier compared to traditional bank ones, they carry more risk due to being over-secured and the volatility of the assets used to guarantee them. Just to give you a picture, Michael Egorov, the founder of Curve Finance, lost over $100 million worth of DeFi loans across multiple accounts in June.

However, it’s not all doom and gloom. Some experts believe the crypto loan scene has matured enough to withstand major market downturns. High-risk DeFi loans recently hit a two-year peak over $5 million, a mark last seen in July 2022. At the time of writing, Benqi lending protocol alone had almost $5 million worth of high-risk loans. The protocol has issued more than $115 million in total debt, with just $5 million being considered “risky” as of now.