DeFi liquidations: Volatility and liquidity - 0 views
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John Kiff on 01 Aug 23The OECD published a report that analyzes the connection between decentralized finance (DeFi) protocol liquidations and price volatility in decentralized exchanges (DEXs). The analysis employs transactional data of three of the largest DeFi lending protocols and suggests a positive relation between liquidations and post-liquidations price volatility across the main DEX pools. It also shows a positive correlation among borrowing rates and across different assets, which indicates that the liquidity in DeFi lending pools is connected, and that at extreme events, when investors pursue the same strategy at large numbers, liquidity of a particular asset may dry up in each of the pools across protocols. This implies that the liquidations mechanism might be limited in its ability to restore liquidity, as liquidators themselves rely on the liquidity available in the pools to repay underwater loans.