Key Points About High-Risk Loans:
|
Loan Status |
Collateral Value Change |
Risk Level |
|
Safe |
Value steady or rising |
Low |
|
High-Risk |
Collateral drops by 5% |
Very High |
|
Liquidated |
Collateral drops over 5% |
Loan is sold |
The sharp rise in these high-risk loans indicates a chance of liquidation cascades. In this scenario, the protocol sells off collateral, which lowers prices and causes other liquidations. This chain reaction can cause extreme market volatility.
IntoTheBlock has warned that large-scale liquidations may lead to a downward spiral in prices. They pointed out that, if collateral values drop fast, lenders may suffer from bad debt. Bad debt happens when there isn’t enough collateral to cover the loans. This reduces liquidity, making it hard to trade without triggering further price drops.
Bad debt also discourages lenders from providing new liquidity. Without enough liquidity, the market could struggle to stay stable, which might lead to further price declines. Lenders may be hesitant to take on more risk, increasing uncertainty in the market.
With $55 million worth of high-risk loans currently in play, the decentralized lending market faces potential instability. If crypto prices continue to fall, these loans may trigger a series of liquidations, creating more volatility for the entire market.
This rise in risky loans shows just how delicate the market can be, especially when prices fluctuate rapidly. Crypto traders and lenders should be cautious in this volatile environment to avoid major losses.