DeFi Borrowing Demand Drops 33% Amid Crypto Market Turmoil

Borrowing demand across decentralized finance (DeFi) protocols has experienced a significant decline following the recent turmoil in the crypto market. This drop is indicative of widespread deleveraging as crypto investors unwind their risky positions.

The average U.S. dollar stablecoin yield, which represents what protocols pay out to lenders for lending out their assets, fell to 2.8% on Tuesday, marking its lowest level in a year. This figure is notably below the average U.S. dollar money market rates in traditional markets, which stand at 4.3%, and represents a substantial decline from the mid-December peak when DeFi rates exceeded 18%.

This shift reflects a broader risk-off sentiment spreading across crypto markets, with investors reducing their leverage amid volatile price movements. As users repay loans and liquidations clear out under-collateralized positions, the demand for borrowing decreases. Meanwhile, the deposits available for lending on protocols have remained stable, meaning that the declining revenue from borrowers is spread among the same number of lenders, exerting downward pressure on yields. This situation creates a "negative double-whammy" for the rates that the remaining lenders are receiving, according to Ryan Rodenbaugh, CEO of Wallfacer Labs, the team behind vaults.fyi.

The sharp decline in yields and deleveraging was further intensified by the recent market turmoil, as major DeFi lending protocols reported a wave of liquidations due to rapidly falling asset prices. Bitcoin (BTC) and Ethereum's ETH, two assets predominantly used as collateral for crypto loans, experienced declines of 10%-15% below $75,000 and $1,500, respectively.

Aave, the largest decentralized lending market by total value locked (TVL), processed over $110 million in forced liquidations during the Sunday-Monday market decline. Sky, issuer of the $7 billion USDS stablecoin and one of DeFi’s largest lending platforms, also liquidated an ether whale's $74 million DAI loan collateralized by 67,570 ETH, worth $106 million at the time. Another large lender with 65,000 ETH in collateral scrambled to pay off portions of their $66 million loan to avoid a similar fate, reducing the outstanding debt to $28 million.

The total value of borrowed assets on Aave dropped to $10 billion on Tuesday, a significant decrease from over $15 billion in mid-December. Morpho, another key lending protocol, saw a similar drop to $1.7 billion from $2.4 billion during the same period. This decline in borrowing demand and the subsequent liquidations highlight the current risk-off environment in the crypto market, as investors seek to reduce their exposure to volatile assets.