Significant Decline in Borrowing Demand for DeFi Protocols Following Recent Market Crash
Following the recent market crash, the borrowing demand for decentralized finance (DeFi) protocols such as Aave and Morpho has significantly declined, indicating a widespread deleveraging phenomenon.
Benchmark data from DeFi yield platform vaults.fyi shows that the average yield on US dollar stablecoins (the interest rate paid to lenders by the platform) dropped to 2.8% this Tuesday, marking the lowest level in a year. This is far below the average interest rate of 4.3% in traditional dollar money markets, and significantly lower than the DeFi rates that exceeded 18% during the peak of the crypto market in mid-December last year.
DeFi’s average lending rate in dollars has plummeted, but the assets available for lending remain stable. (Source: vaults.fyi)
This trend reflects a risk-averse sentiment spreading across the entire cryptocurrency market, as investors reduce leverage in response to extreme price volatility. As users of lending protocols like Sky, Aave, and Morpho repay loans and liquidate under-collateralized positions, borrowing demand has subsequently declined. At the same time, data indicates that deposits available for lending remain stable, meaning that the income from borrowers has decreased but still needs to be distributed among the same number of lenders, further pressuring the yield.
The market crash over the past weekend exacerbated the decline in yields and the deleveraging situation, as major DeFi lending protocols experienced massive liquidations during the sharp drop in asset prices, with Bitcoin (BTC) and Ethereum (ETH) prices falling by approximately 10% and 15%, respectively. As of the time of this article’s publication, Bitcoin was trading at $77,000, while Ethereum was at $1,475.