DeFi Faces $88 Billion in Risks from Liquidity Crunches, Stablecoin Depegs, and Mass Liquidations

DeFi has evolved into a complex network of lending markets, stablecoin ecosystems, and liquidity pools. This growth, while offering numerous opportunities, also introduces new risks that require significant expertise to navigate effectively. The DeFi market, with around $88 billion in total value locked, is fragmented across different chains, each with varying user bases and track records. This complexity necessitates a robust risk management framework that can address a wide range of economic risks.

One of the major risks in DeFi is sudden liquidity crunches. During market stress, lenders often rush to withdraw funds, causing utilization in lending pools to skyrocket. For example, in March 2023, the DAI market on Aave reached near 100% utilization, forcing interest rates to spike sharply to entice repayments and new deposits. Without such intervention, users remaining in the pool might have found themselves unable to withdraw as liquidity dried up.

Another significant risk is stablecoin depegs. Stablecoins can lose their peg with little warning, sending shockwaves through markets. A notable case occurred on April 2, 2025, when First Digital USD (FDUSD) plunged to $0.93 after allegations of insolvency against its issuer. Such depeg events not only erode trust but also threaten any protocols or liquidity pools relying on that stablecoin, causing imbalance in Curve pools and panic withdrawals.

Cascading liquidations are another risk. A sharp price drop in a major asset can trigger chain-reaction liquidations across DeFi lending platforms. Falling prices force leveraged positions to unwind, which can depress prices further and liquidate even more loans in a vicious cycle. For instance, the “Black Thursday” crash of 2020, where a 50% single-day drop in ETH led to a wave of liquidations and even protocol insolvencies, highlights this risk.

These examples illustrate the need for continuous, in-depth risk monitoring in DeFi. Sudden liquidity shortfalls, peg breaks, and mass liquidations highlight the importance of staying on top of a wide range of risk metrics relevant to your positions. In fast-moving markets, timing is crucial—by the time an average investor reacts to rumors or price charts, the damage might already be done.

Aave, one of DeFi’s largest money markets, is a key protocol to watch when determining potential risks in the market. If you’re an institutional investor in DeFi, chances are high you’ve deployed capital in the protocol. But even if you’re not deploying into Aave, the protocol’s strong position could be important when watching out for potential risk events in the broader market. One way to monitor risk on Aave is by categorizing each loan by a health factor based on collateral vs. debt. When that health factor approaches 1.0, the liquidation threshold, the loan is at high risk of being liquidated.

A sudden increase in high-risk loans can result from extreme price movements, causing the collateral in the loans to drop. When this is significant enough, it can force liquidations and even create cascading liquidations. Continuously monitoring the amount of high-risk loans is essential, but impractical without tools like IntoTheBlock’s risk Pulse, which can spot these conditions automatically.

Another key signal on Aave is large movements of assets into or out of the protocol. Peaks in liquidity flows, specifically outflows, can indicate risk conditions. For instance, a large withdrawal of WETH from Aave may suggest that a whale is pulling collateral, perhaps out of concern over market volatility or to deploy elsewhere. This sudden outflow can tighten the available liquidity on Aave, driving interest rates higher. Conversely, a surge of WETH deposits could temporarily boost Aave’s liquidity and signal that big players are gearing up to lend or provide collateral for borrowing.

Curve, another leading DeFi protocol, is the backbone of stablecoin liquidity in DeFi, hosting pools where users trade and stake stablecoins and other pegged assets. Risk monitoring on Curve focuses on peg stability and market depth. When a token in a Curve pool drifts from its intended peg, liquidity providers (LPs) are often the first to feel the impact. A small price deviation can quickly spiral into a pool imbalance, leaving LPs holding the riskier side. Recent events like FDUSD’s depeg on April 2, 2025, highlight the importance of rapid detection. Early alerts flagging the initial drift would have given LPs time to exit or hedge.

Curve risk isn’t only about price; it’s also about depth. When liquidity in a pool is thin, slippage worsens, and the ability to swap out becomes constrained. It’s crucial to watch for sudden shifts in pool liquidity. Market events, like extreme price moves, can cause uncertainty, leading people to withdraw their liquidity. Additionally, pool liquidity can consist of just a few large providers, meaning that just a few entities withdrawing can significantly alter market depth, exposing you to risk.

For funds managing liquidity on Curve, real-time alerts that combine large transactions with depth changes are critical. They offer a chance to exit, rebalance, or even deploy capital to stabilize the peg before the rest of the market catches up. One recurring theme in these discussions is the outsized influence of whale investors, entities or addresses that control very large positions. Whale behavior can move markets or distort liquidity precisely because of their scale. On-chain analytics reveal these “whale concentration” risks by flagging pools where a few large lenders dominate. If three addresses supply half a pool’s liquidity, that pool is fragile: the first whale to exit could lock everyone else in until fresh capital arrives or high rates force borrowers to repay.