According to CoinDesk: Ether’s recent sell-off triggered liquidations of collateral locked in prominent Ethereum-based lending and borrowing protocols, also referred to as decentralized money markets. At the same time, some of these decentralized finance (DeFi) applications made a handsome amount of money through liquidation fees: MakerDAO collected more than $15 million.
Ethereum money markets AAVE, Compound and MakerDAO processed a total of $200 million of liquidations on January 21 – a record single-day tally – with MakerDAO accounting for more than half. Typically, these DeFi protocols see less than $10 million of daily liquidations.
According to the Defiant Terminal: the focus is now turning to the impact on leverage many investors use to amplify their earnings. Key platforms are liquidating the collateral users put up to secure borrowings, usually made in a stablecoin like DAI (issued by MakerDAO).
Liquidations spiked to 1,692 on Aave, DeFi’s largest protocol, on Jan. 23. That’s the highest since the crash in late May 2021. MakerDAO had its own local high of 95 liquidations which came on Jan. 22, also the highest mark since late May for the protocol.
While the number of Aave liquidations outpaced Maker’s, the reverse was the case for USD-denominated value of the liquidations — Maker hit $118.8 million in liquidations on Jan. 21, while Aave maxed out in terms of daily highs at $61.13 million on Jan. 22.
The Maker liquidations on Jan. 21 were discussed on Twitter by the protocol’s founder Rune Christensen, who said there was over $600 million in ether in danger of liquidation at the time. While all of it wasn’t liquidated, the run on Jan. 21 represented the highest value of liquidation on Maker in the past year.
The liquidation story in this selloff is important because it marks a big test for the functionality of DeFi in a high-stress period. While users have been rocked by liquidations in the past week, DeFi has continued to operate as intended, which is a bullish sign for its utility in the long term.