High-risk DeFi loans are surging as market sentiment drives demand for leverage

The DeFi analytics platform IntoTheBlock confirmed on November 7 that high-risk DeFi loans had surged due to market sentiment increasing their demand among investors. The DeFi analytics firm still expressed growing concern about volatility within DeFi due to the U.S. presidential elections.

According to IntoTheBlock, possible volatility could put pressure on leveraged positions. Investments in high-risk loans involve using borrowed funds to increase the potential of returns. In the past, investors with leveraged positions could either benefit from volatility or fall into higher risks.

The current rise in decentralized finance loans has been visible since the beginning of the year, with multiple lending protocols, including EigenLayer, gaining popularity. In June, decentralized finance lending reached over $11 billion in loans issued. Aave V3 led the lending protocols, garnering over $6 billion in total loans issued.

High-risk DeFi loans, which gained popularity during the pandemic, spiked the most in September 2021. Since then, the performance has fluctuated, with several low seasons, including early 2022 and late last year.

High-risk DeFi loans reach a 2-year high on Benqi

A key indicator to watch in lending protocols is high-risk loans. Here’s why this matters

High-risk loans are loans within 5% of liquidation. Spikes in high-risk loans can contribute to:

Cascading Liquidations: Large liquidations can impact the collateral value, putting more… pic.twitter.com/YV1YAGwDrG

— IntoTheBlock (@intotheblock) October 16, 2024

IntoTheBlock revealed on October 16 that high-risk DeFi crypto collateralized within 5% of their liquidation price had hit a 2-year high, reaching $55 million on Benqi. The platform, a leading decentralized finance staking and lending protocol on Avalanche, reached the high for the first time since June 2022.

The analytics firm explained some of the possible results of spikes in high-risk decentralized finance loans during its analysis. The firm explained the risk of cascading liquidations, which could significantly affect the collateral price. Likewise, there could be an avalanche effect, causing more loans to be at risk of liquidation, eventually leading to a downward spiral in prices.

The blockchain analytics company also explained the risk of the loans having insufficient collateral, leading to losses and bad debts for debtors. Lenders will, in turn, be cautious about adding liquidity to lending platforms to prevent further losses.

DeFi becomes bullish after Trump’s victory

Crypto has generally had a rebound since the presidential elections on November 5, despite the expected volatility. In a report from November 1 from the FalconX Head of Research David Lawant, the volatility could be expected to be high if the election results were too close to call or the results took a long time to be announced.

“Additional volatility, however, could emerge if results are too close to call and it takes too much time to reach an outcome.”

– David Lawant, FalconX Head of Research

So far, coins have been performing well. Yesterday, Bitcoin reached an all-time high of $75,000. Ethereum also saw a notable boost, reaching over $2,800.

The boost in crypto markets has increased speculation among investors that DeFi is going to have a renaissance. Defiance Capital co-founder Arthur Cheong predicted the rebirth of decentralized finance due to Trump’s possible election as president. During the entire campaign, the President-elect sold himself as pro-crypto, with the crypto community now expecting more friendly regulations.

According to Cheong, DeFi applications, including lending, will see an increase in user base after a few low years. Additionally, Trump has been involved in crypto projects, standing as the Dynamo DeFi Chief Crypto Advocate.

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