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Ethereum crash questions sustainability of DeFi markets

  • The collapse of the Ethereum (ETH) price has caused around 600 million dollars to flow out of the DeFi sector since mid-February.
  • The volatility of the crypto market underlines how vulnerable the DeFi sector is.

March and late February were devastating for the crypto market. Bitcoin and the major cryptocurrencies have suffered significant losses. The number one cryptocurrency in terms of market capitalization lost about 50% of its price, falling from about $8,000 to $3,700. This sudden crash occurred on March 12th with negative effects on the entire crypto market.

Ethereum: About 600 million dollars flow out of the DeFi sector

Ethereum also suffered from the market crash. The cryptocurrency recorded steady gains in January.On 1 January, the price of ETH was 127 dollars and rose to its year high of 285 dollars on 13 February. However, as uncertainty about the expansion of COVID-19 increased, so did market volatility. As a result, the ETH price also fell by around 58% in a single day, falling from $194 to $109 within 24 hours.

When ETH reached its yearly high in 2020, the DeFi market also reached a one-year high in total value of $1.23 billion. The sudden crash, however, simultaneously caused a crisis in the DeFi sector. The DeFi market lost around 600 million dollars and, at the time of publication, had a total value of only 588 million dollars, a level that the DeFi market had last reached in the first half of 2019, as shown in the graph below.

Ethereum ETH

Source: https://defipulse.com/

This 58% drop in the price of ETH caused platforms like MakerDAO to suffer a failure in their protocol. As the price dropped dramatically, combined with a delay in Ethereum’s network, numerous borrowers saw their Collateralized Debt Positions (CDP) liquidated for 100% of their value.

At that time, ShapeShift.com CEO Erik Voorhees responded to community criticisms of the vulnerabilities in the DeFi sector. Voorhees said that Bitcoin still held its position as a store of value and the DeFi market remained alive, despite having a bad day. Voorhees said:

In the coming months the world will see what anti-fragile means.

The managing partner of the investment firm Multicoin Capital, Tushar Jain, questioned this claim and was critical of the sustainability of the DeFi market. Jain stated the following via Twitter:

I am worried that DeFi cannot be sustainable if the whole ecosystem could get liquidated in less than 24 hours. That was a real risk today.

It remains to be seen whether the uncertainty over COVID-19 will continue in the coming months. If volatility continues to rise, the DeFi market could return to its vulnerability. If investor confidence is totally lost, the ecosystem could become completely unsustainable, as Jain claims.

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Reynaldo Marquez has closely followed the growth of Bitcoin and blockchain technology since 2016. He has since worked as a columnist on crypto coins covering advances, falls and rises in the market, bifurcations and developments. He believes that crypto coins and blockchain technology will have a great positive impact on people's lives.

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