DeFi Borrowers More Likely to Borrow After Liquidation: Study Finds

A new study by researchers at the International University of Monaco found that borrowers who have their collateral liquidated on DeFi lending protocols, such as Aave, are not discouraged from borrowing again. In fact, they tend to borrow more often. The researchers argue that the DeFi system imposes no lasting handicap equivalent to a bad credit score, and many participants treat liquidations as a routine risk. The study examined 25,798 liquidations between March 2022 and December 2024 on Aave, the largest DeFi lending protocol.

A new study by researchers at the International University of Monaco has revealed an intriguing pattern in the behavior of borrowers on decentralized finance (DeFi) lending protocols, such as Aave. The study, which analyzed 25,798 liquidations between March 2022 and December 2024, found that borrowers who experience collateral liquidation are not discouraged from borrowing again. Instead, they tend to borrow more frequently, treating liquidations as a routine risk rather than a lasting handicap equivalent to a bad credit score [1].

The DeFi system's unique characteristics, such as anonymity and the use of smart contracts, contribute to this resilience. Borrowers and lenders interact without revealing their identities, making traditional creditworthiness assessment methods unfeasible. Instead, DeFi relies on overcollateralization as a risk management tool, as there is no other way to assess the borrower’s ability to repay [1]. This environment fosters a culture where liquidations are seen as a part of the borrowing process rather than a permanent setback.

The study highlights that while the overall DeFi lending volume is still modest compared to traditional financial systems, the rapid growth and evolution of the DeFi ecosystem warrant close monitoring. The lack of supervision and high degree of interconnectedness in the crypto ecosystem further underscore the need for understanding the motivations driving investors into these platforms [1].

The study's findings align with broader trends in DeFi lending, where both retail and large investors are primarily motivated by speculative reasons and the potential for high returns through market movements and price speculation [1]. However, large-scale investors engage relatively more in DeFi borrowing for governance motives, seeking to influence protocol decisions and accrue more significant governance rights.

The implications of these findings are significant for both investors and regulators. For investors, understanding the motivations behind DeFi borrowing and lending can help them make more informed decisions. For regulators, the study underscores the importance of monitoring the DeFi market closely, given its rapid growth and the unique risks it poses.

References:
[1] https://www.sciencedirect.com/science/article/abs/pii/S1042957325000348