Finance Décentralisée

Decentralised Finance (DeFi)

The OECD has today released a report that analyses the connection between hashtag #DeFi protocol hashtag #liquidations and hashtag #price hashtag #volatility in decentralized exchanges ( hashtag #DEXs ).

• Key takeaways:
📍 This work delves into the liquidations mechanism inherent in Decentralised Finance (DeFi) lending protocols and the connection between liquidations and price volatility in decentralised exchanges (DEXs). https://www.linkedin.com/feed/update/urn:li:activity:7091842016833122304/

📍 The analysis employs transactional data of three of the largest DeFi lending protocols and provides evidence of a positive relation between liquidations and post-liquidations price volatility across the main DEX pools.

📍 The analysis made use of transactional hashtag #onchain data of three of the largest DeFi lending protocols by Kaiko.

📍 There is a positive relation between liquidations and price volatility in the sample examined.

📍 Without directly observing the behaviour of liquidators, these findings indirectly indicate that liquidators require market liquidity to carry out large liquidations and affect market conditions while doing so.

📍 The analysis also shows a positive correlation among borrowing rates in the three large pools examined and across different assets, which indicates that the liquidity in DeFi hashtag #lendingpools examined is connected, and that at extreme events, when investors pursue the same strategy at large numbers, liquidity of a particular asset may dry up in each of the pools across protocols.

📍 This implies that the liquidations mechanism might be limited in its ability to restore liquidity, as liquidators themselves rely on the liquidity available in the pools to repay underwater loans.

Congrats to OECD Iota - Kaousar Nassr Ana Sasi-Brodesky, PhD and their team for the insightful report.