The total amount of "high-risk loans" in the decentralized lending market rose to $55 million on Wednesday, reaching its highest level since June 2022, according to data tracked by analytics firm IntoTheBlock.
Source: IntoTheBlock
Cryptocurrency traders typically lock up collateral in the form of digital assets to borrow from decentralized lending platforms, with the risk that if the value of the collateral falls too much, the protocol will sell the collateral to liquidate the debt. High-risk loans refer to those loans that are only 5% away from the liquidation price. Once the collateral price falls to the liquidation price (a drop of 5%), its value will not be enough to cover the loan, thus triggering liquidation.
Therefore, the surge in these risky loans is worthy of concern as it could lead to a chain of liquidations. IntoTheBlock said that large-scale liquidation activities will affect the value of collateral, putting more loans at risk of liquidation, causing prices to spiral downward.
The company further noted other negative impacts: "Insufficient Collateral Value: Rapid market declines could result in insufficient collateral to cover loans, resulting in bad debts and losses to lenders. Market Liquidity Issues: Bad debts in the market could deter lenders Add new liquidity to protect against potential losses."
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