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- The vulnerability of the DeFi sphere has been demonstrated as a result of Ethereum’s recent price drop.
- Maker DAO experienced a historic day of liquidations at the weekend.
Just yesterday Crypto News Flash reported that the total amount of Ether (ETH) tied up in Decentralized Finance (DeFi) applications has reached a new all-time high. However, Ethereum‘s sharp fall in price was not without impact on the largest DeFi application, MakerDAO. While the amount of ETH in DeFi applications is still growing, the insights for Maker DAO look somewhat different.
Maker DAO suffers from falling ETH price
Before the “Black Friday”, Maker DAO was booming. However, when the Ethereum price fell by about 20 percent to 148 USD within the last seven days, the vulnerability of the DeFi sphere became apparent. Last weekend, the supply of “Single Collateral DAI” shrank from over 102 million to 84 million.
The Single-Collateral Dai is a mechanism for the liquidation of Liquidity Providing Contracts, a smart contract that trades directly with Ethereum users and owners according to the system’s price feed. When a CDP is liquidated, it is immediately captured by the system. A CDP allows users to use Ether as a deposit to pay out Dai, which can then be used to trade crypto or convert to cash as needed.
The falling prices immediately led to liquidations of CDPs worth over $3 million, according to DeFiSaver. On 22 November, a total of USD 9.1 million was liquidated on the dx/dy exchange.
I believe Nov. 22 is the largest daily collateral liquidation day on dYdX: a whopping 9.1M 😱😰 #DeFi #crypotcurrency #ethereum pic.twitter.com/yOipDZAP9o
— DefiMoon 🦇🔊 (@DefiMoon) November 22, 2019
Collateral also fell to 295% from a recent high of over 360%. For maker DAO, the lower limit of the collateral is 150%. This is the value of the blocked ETH divided by the number of Dai withdrawn from a CDP.
Due to these negative fundamental data, the Maker (MKR) price also suffered a setback and dropped over the weekend from 546 USD to 477 USD at times. Currently, however, the price is around USD 498 again, possibly also due to the hype surrounding the introduction of a multicollateral DAI.
Ultimately, the weekend has shown that the DeFi is currently exposed to stability risks as long as Ethereum remains as volatile.
How will the DeFi affect the Ethereum price?
But not only Ethereum has a direct influence on the Maker price. The relationship can also be reversed. Many investors expect DeFi to be a driving factor for a mid- to long-term increase in Ethereum’s on-chain activity. This, in turn, could also be a key factor for the price development of ETH.
Whether this will actually happen remains to be seen. In the short term, the use of ETH as security in the DeFi could also be a disadvantage for the Ether price. Sales could reinforce (or have reinforced) the current downtrend, as various platforms have liquidated ETH to meet debt obligations.
One factor that could positively influence the Ethereum (ETH) price in the short term is the Istanbul hard fork. This will take place on December 7th and will contribute to the improvement of Ethereum’s fundamentals, as well as Ethereum 2.0.
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