ETH Plunges: $126M Position Nears Liquidation, DeFi Ecosystem at Risk

Ether (ETH) prices plummeted on Tuesday, with a single position worth over $126 million coming within 4% of being liquidated. This marked a significant retreat from Sunday's rally, as ETH shed 22% of its value within 48 hours, trading at around $2,080.

Fortunately, a bounce at the $2,000 level protected Ethereum's decentralized finance (DeFi) ecosystem from a series of liquidations on the MakerDAO platform. The first liquidation level was at $1,929, with two more positions set to be liquidated at $1,844 and $1,796. The combined value of these three positions was approximately $349 million.

Price action often gravitates towards liquidation levels, as trading firms target areas of supply. When a liquidation is triggered on MakerDAO, the ETH pledged as collateral is sold or auctioned off, with a portion of the fees going to the protocol. In the case of MakerDAO, the ETH is often purchased at a discount and later sold on the wider market for a profit, which can potentially cause an additional drawdown in price.

Liquidations in DeFi are more impactful than futures, as they involve spot assets and not derivatives, which boast higher levels of liquidity due to high leverage. In this case, it is advantageous for trading firms to target these levels, as a liquidation would provide short-term volatility and potentially trigger a cascade, where one liquidated position forcibly leads to several others.

Once a cascade is concluded and buyers have absorbed the fresh supply, prices typically head back up, which can tempt the liquidated trader into buying back their long position. Data from DefiLlama shows that $1.3 billion worth of ether is liquidatable, with $427 million of that being within 20% of the current price.

ETH has underperformed against bitcoin (BTC) throughout the recent bull market, slumping to a ratio of 0.0235 compared to previous cycle highs at 0.156 and 0.088. This is partly due to institutional inflows into numerous spot BTC ETFs, but also due to the rise of other blockchains like Solana and Base that have stolen market share.