DeFi protocols avoid shut downs despite near-record activity in latest market capitulation

DeFi activity moved to the highest levels since the October 10-11 crash. The recent market capitulation turned into a DeFi stress test, with most protocols surviving the sudden spike in activity. 

DeFi activity picked up during the latest market downturn, reaching its highest levels of DEX activity in the past few months.

Leading decentralized protocols still produce some of their highest fees, with most activity concentrated on Aave, Morpho, Jupiter, and other leading DeFi protocols and DEXs. The most active elements of the DeFi ecosystem are still perpetual futures DEX, lending, and general DEX aggregators and markets.

The major difference during this crypto cycle is that the downturn has not caused cascading liquidations or the breakdown of DeFi protocols. All involved DEXs and chains handled the extreme trades and traffic. 

The biggest shift in activity came from perpetual futures DEXs, which have already turned into some of the most liquid markets. Peak liquidity was concentrated on Hyperliquid and Aster. 

The current market downturn did not cause major rug pulls, liquidity problems, or DeFi liquidations, as most of the protocols installed sufficient protections. Hyperliquid survived its current trading overload, with fewer cascading liquidations compared to October’s event. 

DeFi slows down, but avoids crash

DeFi activity slowed down, as value locked fell to levels not seen since March 2024. Most of the protocols remained relatively resilient, as the collaterals were deposited at a lower price range. 

Despite the drawdown, protocols like Aave and Lido continue to draw in deposits and active lending, among the biggest fee producers in the Ethereum ecosystem. On-chain lending remains well above its 2022 levels, holding over $51B in value locked. 

During previous market cycles, lending was heavily affected by drawdowns due to panic and the lack of protection. In the latest market cycle, most of the leading protocols showed no signs of distress or bad loans. 

ETH liquidation levels are slightly lower than the market, with the first significant liquidation level in the $1,890 range. The busiest protocols like Morpho reported 5,000 liquidations valued at $105M in the past 24 hours, but the remaining vaults and positions remain stable. Other protocols are processing loan repayments as usual, avoiding a liquidation cascade. 

Despite the relative stability, users are urged not to take out new loans on decentralized protocols. The increased market volatility may accelerate liquidations in the future. However, the unwinding is still gradual compared to previous cycles. 

Does DeFi still hold risks?

While DeFi has shown it is technically robust, the ecosystem still holds risk during a protracted market downward move. 

The first major risk is ETH-based liquidity, which may trigger liquidations if not all loans are repaid. 

Other risks include the draining of liquidity from some of the leading trading pairs, especially those concentrating liquidity at a certain price range. 

The biggest risk is a liquidation cascade if funds have been reused across protocols, opening more positions than the initial ETH collateral supports.

Don’t just read crypto news. Understand it. Subscribe to our newsletter. It's free.