The decentralized crypto lending market experiences significant growth in high-risk loans, now totaling $55 million. This situation creates a threat to the market due to potential mass liquidations.

The Mechanics of Crypto Lending and Its Risks

On decentralized platforms, users take out loans using cryptocurrency as collateral. The core risk lies in the drop in collateral value. If prices decrease too rapidly, protocols are forced to sell the collateral to repay loans. Loans within 5% of liquidation can swiftly enter the liquidation process if collateral values decline.

The Potential for a Market Downturn

The increase in high-risk loans raises the likelihood of mass liquidations that could trigger a domino effect, leading to a broader market collapse. The mass sale of crypto collateral can rapidly lower its price, triggering further liquidations and exacerbating the market situation. The report warns that successive liquidations could cause a serious market crash.

Market Risks in Volatile Conditions

The current situation highlights the vulnerability of decentralized lending platforms during periods of extreme volatility. If prices fall too far, collateral may become insufficient, resulting in losses for both borrowers and lenders.

The crypto lending market faces substantial risks associated with high debt levels and volatility. Measures are needed to mitigate this impact to prevent a potential crash.