Market Selloff and DeFi Resilience

A steep market selloff, driven by President Donald Trump’s introduction of tariffs against key U.S. trading partners, wiped billions off the industry’s total market capitalization. Yet some DeFi founders consider the move a bullish sign.

Despite ether dropping by at least 35% and Solana around 25%, several key protocols held up against the stress test, developers told The Block.

Marc Zeller, founder of the largest Ethereum lending protocol, stated, “The protocol’s goal is to keep position healthy, and limit pain to minimum.” This is not a small feat considering these protocols deal with billions of dollars worth of locked or borrowed assets. For instance, Sky, the overcollateralized stablecoin protocol formerly known as Maker, maintains over $10 billion in overcollateralized assets for its $6.7 billion in circulating USDS tokens.

Evan Van Ness, a longtime Ethereum commentator, remarked, “It’s great to see how well it worked, outside of a few isolated incidents of frontends going down. DeFi works better than TradFi in times of crisis.”

Sky had 19 new liquidated positions, accounting for over $8 million worth of assets, according to data from Block Analitica. MakerDAO founder Rune Christensen told The Block, “Everything went flawlessly as far as I’m aware.”

Van Ness noted, “We’ve come a long way from the days when all the Maker liquidators failed and just one was there to scoop all the assets up for free,” referencing the March 2020 global market turmoil due to the COVID-19 crisis.

Putting it into Perspective

Several founders compared the current situation to the liquidity crisis nearly five years ago, which, although it caused pain for many traders, was pivotal in DeFi’s history as it proved that these autonomous systems could operate without bias under severe stress.

Aave processed around $210 million in liquidations during this downturn, according to risk service provider Chaos Labs. In comparison, about $263 million was liquidated on Aave V2 between December 2020 and December 2022, as per a previously published report.

Chaos noted, “Rapid market movement led to substantial liquidation events across lending and perp markets, marking one of the largest liquidation volume days ever,” stating that over 80% of these liquidations happened on Ethereum mainnet for Aave.

Zeller highlighted, “Aave will not force close all user position when a liquidation happens compared to other venues. Only up to half is available for liquidation reducing pain for user.” According to Block Analytica, these liquidated positions ranged from tens of thousands to under $100.

The recent events echoed March 2020’s “Black Thursday,” when news of COVID-19 lockdowns caused a 48% price drop for ETH, leading to cascading liquidations in the young DeFi sector. Many recall this day as a pivotal moment for DeFi, demonstrating that these systems could operate without bias and withstand severe stress.

Zeller views the performance of the protocol and other decentralized platforms as a testament to the efforts put into designing safe systems that simply “work.” He noted that the Aave team is working on integrating Chainlink’s Smart Value Recapture solution to enhance liquidation efficiency and profitability.

While the total amount liquidated across the entire crypto scene is still uncertain, largely due to underreported data from centralized exchanges, clearer insights can be extracted from protocols like Sky and Aave. Bybit CEO Ben Zhou suggested on Monday that total crypto liquidations over the past day were in the $8 to $10 billion range.