Escalation in DeFi Liquidation is Not Good for the Industry

In the last few days, the crypto market witnessed nearly $385 Million liquidated in perpetual contracts; this is not good for the DeFi ecosystem. However, this recent spike can be attributed to the volatile situation pertaining to the market. Liquidation is a scenario where crypto exchanges close out long and short positions of traders when the initial margin goes below a required threshold.

Binge Liquidation in Decentralized Finance (DeFi), a Bad Scenario

The United States Securities and Exchange Commission (SEC) increased regulatory actions by 183% post-FTX-saga against the crypto industry. Prices seem to be on the verge of dropping into a hole with no bottom. As the DeFi ecosystem majorly revolves around Ethereum, ETH price is also descending in correlation.

At press time, ETH is trading at $1,755.79, dropping 0.70% in the last 24 hours, 7.30% in seven days, and 2.25% in 30 days. However, the price gained 37.52% during the previous six months and 46.48% YTD while the 1-year change comes with a slight jump of 5.48%. Its market cap swelled by 0.69% to $211 Billion, and the trading volume lost 11.56% to $7.11 Billion.

The total value locked (TVL) over the ecosystem dropped by 2.78% in the last 24 hours, to $25.54 Billion at press time. While taking long positions into Ethereum futures contracts, traders are betting for a rally. But, if the southbound movement continues, they might need more funds to hold the position and be liquidated.

Considering the symbiotic relationship between Ethereum and the Decentralized Finance ecosystem, this liquidation spree could further derail the price. ETH price rallied nearly 80% till April 2023, near the launch of Ethereum Shapella Upgrade. But since then, the price has dropped around 18%, with slight changes in recovery.

Since March 2023, the price action has been consolidating within a range denoted by the rectangular box. Price broke the box, rallying for a while, but since then, it has failed to break out confidently. The recent southbound break is still above the ascending EMA, so the price could bounce off and consolidate again until the air clears.

The data from DeFiLlama is troubling as it argues that if ETH falls below $1,753, to around $83.5 Million, stETH will face collateral liquidation. The number shall reach around $26 Million if the price drops below $1,681. Also, if the Bitcoin price drops to $23,194, around $24 Million worth of WBTC could be liquidated.

Coinglass data shows that around $17.48 Million worth of ETH is liquidated, while for market leader Bitcoin this number swells up to $22.58 Million. If it continues, this trend could have disastrous effects on the industry in the long run. Heavy liquidation does not play a hero in the story if the history of bull runs in the crypto industry is scrutinized.

Disclaimer:

The views and opinions stated by the author, or any people named in this article, are for informational purposes only and do not establish financial, investment, or other advice. Investing in or trading crypto assets comes with a risk of financial loss.

Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing