Liquidation Alert As High Risks Loans On Aave Reach $1 Billion

Based on a report by data analytics company IntoTheBlock, the quantity of high-risk loans on the outstanding Aave Protocol is reaching high levels as general loan volume within the DeFi space records multi-year highs. This development is believed to stem from investors exploring various investment strategies in a bid to maximise profits in a highly anticipated crypto bull run.

Aave’s High-Risk Loans 5% Short Of Liquidation Threshold

In its weekly newsletter on June 8, IntoTheBlock highlights that DeFi loans are currently estimated at $11 billion representing the height value seen within the last two years. As the biggest lending protocol, Aave accounts for over 50% of those figures with its users having borrowed about $6 billion.

Notably, $1 billion of this debt is categorized as high-risk loans that are placed against volatile collateral. Currently, these loans present substantial risk, with the values of their collateral asset inside 5% of their set liquidation threshold.

For context, the margin call level or liquidation threshold is a predetermined point at which an asset’s value falls to a level where the lender or broker requires the borrower so as to add more collateral to keep up the loan or position. Failure to satisfy this requirement may lead to the automated liquidation of such collateral.

Source: IntoTheBlock

When collateral assets hover around this critical threshold as with the high-risk loans on Aave, any minor dip may result in widespread liquidations. This normally ends in the lack of such assets for the borrower. Nevertheless, in certain conditions where a rapid price decline occurs, the borrower may incur additional losses which could also be transferred to their account balance on the lending platform.

Moreover, liquidations from these high-risk loans may exacerbate market volatility, which can lead to more price loss, resulting in more liquidations in a downward spiral. As well as, many assets getting liquidated without delay can create liquidity crunches which may prevent the Aave protocol from operating easily.

AAVE Price Overview

Meanwhile, AAVE has declined by 5.30% within the last day after facing serious resistance on the $98.20 price zone. The DeFi token is currently valued at $92.30 after an overall negative performance previously week leading to an 11.53% price loss.

Nevertheless, in response to price prediction site Coincodex, the overall sentiment around AAVE stays positive. The team at Coincodex backs AAVE to make a remarkable comeback hitting a price point of $303.87 in the subsequent one month.

AAVE trading at $92.52 on the 4-hour chart | Source: AAVEUSDT chart on Tradingview.com