Traders Face High Liquidation Risk with DeFi Agreement

03/14/2023 21:38 • Tech Trends • 81 views

It is reported that traders who use the DeFi agreement to bet on the recovery of the USDC at the weekend will face 8-digit liquidation risk if the stable currency breaks anchor with the US dollar again this week.

If the USDC discounts again by 10%, the position exceeding US $70 million may face liquidation risk

Analysis based on this information:

The decentralized finance (DeFi) space is witnessing a considerable increase in the use of stablecoins, particularly the USDC, in a bid to capitalize on the digital currency’s stability against the US dollar. However, the stability of these stablecoins is subject to the underlying financial assets that back it, and anything that causes uncertainty in the value of these assets can result in a break of the anchor with the US dollar.

Recent reports indicate that traders who use the DeFi agreement to bet on the recovery of the USDC over the weekend will face an 8-digit liquidation risk should the stable currency break anchor with the US dollar this week. Such liquidation would occur because DeFi agreements require traders to place cryptocurrency or other digital assets as collateral for their trades. Thus, should the USDC appreciate in value, the trader makes profits, but the opposite happens when the USDC loses value, which translates to losses on the trader’s part.

DeFi’s increasing use of stablecoins means that any sudden fluctuations in the value of these currencies (USDC, DAI, Tether) against established currency benchmarks could trigger significant liquidation across DeFi protocols. The sudden dip in USDC value has also raised skepticism among traders about the stability of the digital currency, leading some to hold back from taking positions with the asset, even in the face of a bullish outlook.

The liquidation risk for traders in the DeFi-averse means that they are exposed to substantial losses should the stablecoin’s anchor to the US dollar falter. Though there are group insurance and revenue-sharing agreements designed to cushion losses for traders, the possibility of a sudden shift in the digital currency’s value remains real.

In conclusion, the current trend in DeFi usage means that traders’ liquidation risk based on stablecoins is increasing, as witnessed from the recent downturn in the value of USDC. While traders may continue to take positions with the USDC, the realization that they face high liquidation risk suggests that they should evaluate the pros and cons of trading stablecoins on DeFi platforms thoroughly.

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Traders Face High Liquidation Risk with DeFi Agreement

If the USDC discounts again by 10%, the position exceeding US $70 million may face liquidation risk

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