The Ethereum price dropped by 15 percent against the USD from $278 to $210 within a span of four days. The abrupt drop in the price of ETH led to the liquidation of $3 million worth of loans on decentralized finance (DeFi) platforms.
Ethereum fell too hard too fast
On DeFi platforms, Ethereum users often place ETH as collateral to obtain loans. As such, when the price of Ethereum drops substantially in a short period of time, users need to put more ETH as collateral to maintain their loans.
The DeFi Pulse explained liquidations on MakerDAO, a popular DeFi platform:
“Iif your collateral value falls, you must lock in more ETH, pay back some of your debt, or risk having their CDP liquidated. When a CDP is liquidated, the ETH held as collateral is automatically sold to pay back the debts in addition to a penalty fee for failing to keep your collateral ratio above 150%.”
As the Ethereum price began to pull back rapidly, it reduced the value of the collateral put up by users obtaining loans on various DeFi platforms.
That resulted in liquidations worth of $3 million on-chain, with the majority of happening on dYdX Protocol and Compound Finance, according to TokenAnalyst researcher Ankit Chiplunkar.
“In the last 3 days ETH price fell by 20% this has been a wild time for liquidations. A total of $3M loans have been liquidated on-chain. 59% of those liquidations have happened on dYdX Protocol while 40% are from Compound Finance.”
DeFi loans liquidated as Ethereum price falls substantially (source: Ankit Chiplunkar Twitter)
Risks in DeFi
Due to the decentralized nature of DeFi platforms,