Liquidators line their pockets – Many protocols have suffered from the collapse of the UST and LUNA of Terra Luna. Thus, Anchor one of the main protocols of the Terra blockchain recorded more than a billion dollars in liquidation. An unprecedented event in the DeFi ecosystem.
$1 billion liquidated on Anchor
anchor is the first DeFi protocol of the Terra Luna blockchain. At its peak, liquidity reserves accounted for more than $17 billion. However, in the face of the collapse of the UST stablecoin and the LUNA token, the latter has lost more than 99% of its TVL. So Anchor is now down to just $90 million.
In parallel with the fall of the UST and the LUNA, the Anchor protocol recorded a record number of liquidations. In total, $1.05 billion was liquidated on Anchor in Mayaccording to data compiled by TheBlock.
Unsurprisingly, it’s good the fall of the LUNA token which provoked the overwhelming majority, either 75% of clearances. This represents a total of $750 million. Additionally, the same process liquidated $261 million in AVAX tokens.
Why this avalanche of liquidations?
Anchor is a so-called protocol of lending. In practice, this means that users can take out loans on the protocol by depositing cryptocurrency collateral in exchange.
However, if the value of the collateral deposited decreases and comes dangerously close to the amount borrowed, the protocol will repay the loan by selling the collateral via a mechanism called liquidation.
Thus, when the price of the token LUNA went from $70 to less than a penny in the space of a few days, almost all of the loans made by collateralizing LUNA tokens went into default. Therefore, all these loans have been liquidated.
Under the hood, these are actors external to the protocol, called liquidators, which carry out the liquidations. The latter constantly analyze the chain in search of loans in default. When the collateral of a loan drops significantly, the liquidators trigger its liquidation. This leads to the sale of the deposit. For his part, the liquidator obtains a reward for having kept the protocol healthy and removed the “bad payers”.
The DeFi ecosystem had never seen such a massive series of liquidations. In March 2020, a significant drop in the price of Ether had led to significant liquidations on the MakerDAO protocol. This event is known as DeFi Black Thursday.
Protect yourself from the risk of liquidation by lending your cryptocurrencies. It is ESSENTIAL to make your stablecoins work safely. Earn interest with your USDC on Kucoin Lending (affiliate link).