Lending and leveraging have been fundamental aspects of DeFi for some time. In fact, during the initial DeFi bull run, lending and borrowing were the primary drivers, acting as the catalyst that propelled Total Value Locked (TVL) beyond $190 million. Fast forward to today, and we see renewed bullish momentum, with TVL recently surpassing $100 million. Despite the emergence of liquid staking as a dominant strategy, lending still accounts for over a third of all locked value.
The attraction of high yields and substantial profits is undeniable, ensuring that these protocols retain their appeal. However, beneath the surface of these lucrative opportunities lies a significant risk: liquidation. Liquidation is a term that few in the crypto community wish to discuss openly; it’s akin to firefighters discussing everything except the fires they constantly battle.
Earlier this month, a drop in bitcoin’s price triggered a chain of liquidations, resulting in the forced closure of leveraged derivatives positions worth $1 billion. Similarly, late last year, volatility in the BTC market led to liquidations exceeding $300 million in a single 24-hour period, leaving 77,548 traders with losses.
Is liquidation merely an unavoidable aspect of doing business, a risk that must persist to impart crucial market lessons? Or should we actively promote educational resources and solutions to mitigate these occurrences?
Understanding DeFi Liquidation Risk
Liquidation occurs when a user’s position is automatically closed due to insufficient margin to cover their leveraged positions. This scenario is common in crypto lending, where borrowers use crypto as collateral for loans. If the value of the collateral falls below a certain threshold, the loan is automatically liquidated, resulting in the loss of collateral.
This risk is further heightened in leverage trading, as evidenced by recent market data: aggregate open interest on centralized exchange (CEX) Bitcoin derivatives, which can be leveraged up to 100x, has surged by nearly 90% since October. Liquidations in this context occur when traders fail to meet margin requirements due to price movements in the assets they are trading.
It is challenging to gauge the extent to which liquidation mechanisms are understood or given the attention they deserve. However, it is evident that liquidation remains a significant threat to traders, especially during periods of unexpected market volatility.
Nolus: A Novel Approach to Mitigating DeFi Liquidation Risk
In this context, the emergence of Nolus is noteworthy. The protocol aims to address the inherent risks of DeFi liquidations by drawing inspiration from traditional leasing models. Nolus allows users to pay only a fraction upfront and gain ownership after repayment, thereby reducing the need for over-collateralization that is prevalent in DeFi. This enhances capital efficiency and offers borrowers more favorable loan terms.
Developed by a core team with over 15 years of experience in traditional finance, marketing, and product development, Nolus aims to be a beacon of safety and efficiency in a landscape often characterized as the “Wild West.” The protocol also prioritizes interoperability, connecting various liquidity sources across blockchains without fragmenting assets.
Nolus facilitates asset swapping on any integrated decentralized exchange (DEX), simplifying lending processes and ensuring that liquidity providers deal only with stable assets.
In essence, the protocol combines the best of traditional finance and DeFi, creating a money market between lenders seeking yield on stablecoins and borrowers looking to leverage their equity. Borrowers make a down payment that can be leveraged by a factor of three, with both the down payment and loan stored in a smart contract as collateral.
Nolus’s fixed borrower terms of interest during the lease contract ensure predictability for future cash flows and yield distributions. Lenders are rewarded with actual yield, collected periodically. If unpaid, interest from DeFi Leases is automatically deducted from active positions. While the principal can remain unpaid, a margin call during a downturn triggers partial liquidations to maintain a healthy level.
Nolus has achieved significant milestones amid the recent bull market frenzy, with $25 million in transaction volume, a 72% increase since January, and over 6,739 loan grants. With a 84% and 40% ROI, Nolus demonstrates that alternatives to traditional liquidation risk can be lucrative.
In addition to Nolus, there are other strategies for mitigating DeFi liquidation risk, along with educational resources available to refine these strategies. However, it is fair to say that many DeFi protocols downplay liquidation risk, only acknowledging it when users suffer losses. To avoid such outcomes, it is essential to understand the mechanisms that trigger liquidation and explore alternative protocols committed to minimizing this risk.
