The most recent episode of crypto bank,Bitcoin Suisse’s Decrypt podcast, looked at the digital assets that collateralize the Defi market. With Defi markets having recently withstood a steep cryptocurrency market correction, Dr. Raffael Huber examines major Defi lending/borrowing protocols to see which make the respective platforms’ total value locked (TVL.)
Despite the turmoil experienced by digital asset markets in recent weeks, Bitcoin has held up pretty well compared to the rest of the altcoin market. As, possibly, a result of enjoying a good amount less liquidity than the dominant digital currency, Bitcoin didn’t really lose a lot of value, as most altcoins incurred deep losses.
Market volatility, since about the middle of April, has been on the increase. According to Huber, some of the bearish price action experienced in digital asset markets in the past week is due to the knock-on effect of the liquidation of leveraged positions.
While all this was transpiring, the Defi sector grew to a valuation above $50 billion. Although the Defi sector also took a bit during the recent run of liquidations, interestingly, the scene suffered fewer losses as a result of being less collateralized than centralized trading platforms are.
The show scrutinized the three biggest Defi lending/borrowing platforms (by volume,) Aave $10,4 billion valuation, Compound valued at $6.4 billion, and Maker lagging just behind Compound, at value of $6.3 billion. The purpose of the analysis was to ascertain which digital assets are most used as collateral within the Defi space.
Maker
The Decrypt team’s analysis found that $ETH made up a chunk (nearly 70%) of the Maker platform’s collateral pool. Stablecoins (predominantly USDC) – used as a temporary solution to satisfy demand for the platform’s native stable asset, $DAI – turned out to be the second (13.8%) most used digital asset in the accessing of loans.
Wrapped Bitcoin ($WBTC) came in a close third, at 10.4%. $UniV2 LP, and other digital assets, at 1.8%, and 4.6% respectively.
Aave
Aave is the biggest of the protocols, with 59% of TVL being stablecoins, with $ETH and $WBTC coming in second and third, at 19.1%, and 11.3% respectively. The platform’s native digital asset, $Aave makes up 3.4% of TVL, and oracle token, $LINK accounting for 3.1% of TVL.
Compound
Huber reported that Compound had a similar TVL mix to Aave, with stablecoins properly dominating the mix of the platform’s collateral tokens at 63.3%. $ETH and $WBTC made up a respective 20.6% and 9.7% of the Defi platform’s TVL mix.
Protocol Collateralization
To get a picture of the overall protocol collateralization (depending on collateral supplied) and systemic risk attached to Defi markets in the event of a downward turnaround in the crypto market, the researcher weighed the total of digital assets given as collateral, against the total number of assets borrowed.
Maker came out with the highest collateralization ratio, at 257.8%, at the back of its high stablecoin TVL mix. All three Defi platforms however, are well buffered from market volatility as all three protocols enjoy a collateralization ratio above 200%
Huber concluded by stating that Defi platforms are, by design, capable of withstanding market volatility. Liquidation algorithms and other coded penalties result in systems, usually prevent the accumulation of bad debt. The soundness of the tokens accepted as collateral, the researcher pointed out, is a key to that factor however. Which is the sole responsibility of those who build the platform.
