ETH’s Low Price Triggers Liquidation Risks for On-chain Positions

03/10/2023 15:07 • AI Insights • 81 views

On March 10, it was reported that after ETH plummeted to a two-month low of $1373, several on-chain positions faced the risk of liquidation. According to DeFiLlama’s data, the $9.2 million position on MakerDAO will be cleared at $1367, while the $29.6 million position on Compound will be cleared at $1241 through the smart contract of the agreement.

ETH fell to a two-month low, and positions on MakerDAO and Compound faced liquidation risk

Analysis based on this information:

The recent plummeting of ETH’s price to a two-month low of $1373 has created a scenario of rising risks of liquidation for several on-chain positions. On March 10, reports revealed that the positions on MakerDAO and Compound were particularly vulnerable to liquidation following the dip in ETH’s value. DeFiLlama’s data has shown that the $9.2 million position on MakerDAO will be cleared at $1367 whereas the $29.6 million position on Compound will be cleared at $1241 through their respective smart contracts.

The on-chain position on MakerDAO refers to the use of the platform’s DAI stablecoin for collateral in a borrowing process. The condition for such a transaction is to maintain a minimum collateral value ratio of 150%. In case the value of the collateral drops, and the ratio falls below the required limit, the loan is automatically liquidated. In this case, the $9.2 million position’s collateral value fell below the limit, leading to its clearance at a lower price.

Similarly, Compound’s lending platform allows users to access cryptocurrency loans using collateral such as ETH. The platform works on a similar liquidation mechanism as MakerDAO, where a user’s position is automatically cleared if the collateral value falls below the margin limit. Once again, in this scenario, the $29.6 million position’s collateral value dropped below the margin limit, resulting in its clearance at a lower price by the smart contract.

These scenarios illustrate that the decentralized finance (DeFi) landscape carries significant risks for users due to the uncertainty of cryptocurrency markets. The lower value of the collateral in ETH prompted the automatic clearance of the on-chain positions, demonstrating the importance of keeping the minimum collateral ratio in check. Such market volatility encourages caution in the DeFi ecosystem, as users must weigh the risks and rewards of leveraging their crypto holdings.

In conclusion, while DeFi continues to disrupt traditional finance, it is essential to recognize the risks that come with it. The plummeting value of ETH has once again demonstrated the importance of maintaining appropriate collateral ratios to safeguard on-chain positions against liquidation. Ultimately, users must be vigilant and risk-aware when engaging with DeFi applications to ensure their financial safety.

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ETH’s Low Price Triggers Liquidation Risks for On-chain Positions

ETH fell to a two-month low, and positions on MakerDAO and Compound faced liquidation risk

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