Ethereum’s price drop of nearly 10% on Monday has jeopardized significant DeFi loans on platforms like Sky, with one loan backed by $130 million in ETH at risk of liquidation. Despite efforts to bolster collateral, numerous loans are vulnerable to further declines, highlighting the precarious state of the DeFi market.

Ethereum’s price plummeted nearly 10% on Monday, threatening its role as a key collateral asset in decentralized finance (DeFi) markets. This downturn endangers a significant DeFi loan on the platform Sky, previously known as Maker, which is backed by approximately $130 million worth of ETH. Despite the borrower depositing an additional 2,000 ETH as collateral, the loan remains vulnerable to liquidation due to prevailing market conditions.

The borrower, who secured a $74 million loan in DAI stablecoin, initially pledged 65,680 ETH as collateral, which had been valued around $130 million at the start of the day. At the peak of ETH’s decline, the asset’s price fell to $1,820, dipping below the liquidation threshold just above $1,900. To mitigate the risk, the borrower withdrew 2,000 ETH valued at approximately $4 million from Bitfinex and bolstered the collateral in the Sky vault, raising the liquidation level to around $1,875, which continues to be precarious against the current ETH price.

Other DeFi loans are also at risk due to ETH’s falling price. Current data indicates about $13.6 million worth of loans are at risk if ETH hits a liquidation level of $1,857, and an additional $117 million worth is vulnerable at $1,780. Overall, approximately $366 million in debt could be at stake if ETH experiences a further decline of 20% from its current price.

Liquidation events within DeFi have the potential to exacerbate price declines, as protocols sell off collateral to recover outstanding debts, intensifying market selling pressure. This creates a cyclical challenge for Ethereum, illustrating the interconnectedness of DeFi lending and market health.

The recent plunge of Ethereum’s price below $1,900 presents a considerable risk to numerous DeFi loans, notably the substantial $74 million loan on Sky backed by $130 million in ETH. With liquidation thresholds looming closely and additional loans also vulnerable, the situation reflects the fragile nature of the DeFi market amidst a bearish crypto environment. Addressing these dynamics is crucial for stakeholders in the ecosystem to mitigate further impacts on Ethereum’s market stability.

Original Source: www.coindesk.com

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