• High-risk loans on Aave near critical liquidation thresholds.
  • DeFi loan volumes hit $11 billion, the highest in two years.

Amid a surging DeFi market, the Aave protocol is facing a significant uptick in high-risk loans, raising alarms among investors and analysts alike. According to a recent report by data analytics firm IntoTheBlock, the volume of these risky loans on Aave is nearing critical levels, with collateral values perilously close to liquidation thresholds.

DeFi has been experiencing a resurgence in activity, with total loan volumes reaching an impressive $11 billion, marking the highest levels seen in the past two years. Aave, one of the leading lending protocols in the DeFi space, accounts for over 50% of these figures, with users borrowing approximately $6 billion through the platform.

However, what’s particularly concerning is the substantial portion of these loans categorized as high-risk, totaling a staggering $1 billion. These loans are backed by volatile collateral, leaving borrowers vulnerable to swift market fluctuations. Currently, the collateral assets supporting these loans are teetering within 5% of their liquidation thresholds, a precarious position that could spell trouble if asset values take a downturn.

The liquidation threshold serves as a crucial checkpoint for lenders and borrowers, indicating the point at which additional collateral must be added to maintain the loan. Failure to meet this requirement can result in automatic liquidation, leading to the loss of assets for the borrower. In the case of high-risk loans on Aave, even minor dips in collateral values could trigger widespread liquidations, potentially exacerbating market volatility.

Downward Spiral?

Analysts state that the implications of such liquidations extend beyond individual borrowers, as they can contribute to market instability and liquidity crunches. The sudden influx of liquidated assets could further drive down prices, triggering a downward spiral of more liquidations and price losses.

Adding to the concern is the recent performance of Aave’s native token, AAVE, which has faced resistance at the $98.20 price zone. The token has experienced an 11% price loss over the past week, currently valued at $92.68. While the broader DeFi market continues to see heightened activity, the downturn in AAVE’s price reflects growing apprehension among investors regarding the risks associated with high-risk borrowing practices.

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