Recent Turmoil in Decentralized Finance
Recent turmoil in the decentralized finance (DeFi) space has raised alarms regarding potential liquidity crises stemming from a series of cascading liquidations. On November 3rd, the onset of renewed fears was triggered by Stream Finance’s abrupt halt of both deposits and withdrawals, signaling a peak in the ongoing upheaval within DeFi. This disruption traces back to October 11th, when one of Stream Finance’s external fund managers faced liquidation amid severe market volatility, leading to losses estimated at around $93 million.
Systemic Crisis on the Horizon
The entire DeFi landscape, which boasts a total value locked (TVL) of approximately $8 billion, seems to be teetering on the edge of a systemic crisis, although reported losses to date are around $100 million. Adding to the distress, the liquidity protocol Elixir is grappling with a significant risk exposure of $68 million as a result of these events. In contrast, a co-founder of Morpho attempted to downplay the situation, characterizing parts of the liquidity pool as “insufficient liquidity” while dismissing it as not indicative of a larger systemic issue.
Impact on Stablecoins
Following these incidents, stablecoins have endured their most significant one-week outflow since the catastrophic Luna event, with withdrawals surpassing $1 billion. The market cap of USDe, a leading stablecoin produced by Ethena Labs, has also taken a hit, dropping to under $9 billion, which reflects a staggering 45% decline over the last month.
Measures to Combat Liquidity Challenges
In an effort to combat the ongoing liquidity challenges, Compound has taken proactive measures by suspending certain borrowing markets for stablecoins on Ethereum. Furthermore, the stablecoin USDX from Stables Labs dramatically declined to $0.314 earlier today.
Looking Ahead
The current crisis, which appears to be fueled by leveraged asset cascades and lack of transparent management practices, might just be the beginning of a larger economic reckoning in the DeFi sector. For an in-depth analysis, readers are encouraged to refer to the piece titled “DeFi’s Potential $80 Billion Thunder, Only $1 Billion Exploded So Far.”
