TL;DR:

• October 10 Flash Crash sees ~$19B in crypto liquidations

• Onchain liquidations spike to over $200M

• Watch out for collateral concentration in lending protocols

• DeFi strategy vault protocols at risk due to volatility

• Featured: Dolomite Risk Radar

Current Event Risks

October 10th Flash Crash: DeFi Lending Market Resilience

On October 10th, tariff announcements from the U.S. against China caused a crash across equities and crypto, with many altcoins seeing up to 50% drops in their price. This caused widespread liquidations in centralized exchanges and DeFi, amounting to over $19B.

• The flash crash on October 10 saw multiple large liquidations across major lending platforms

• The largest liquidations came in Aave and Morpho which have seen around $140M and $30M in liquidations over the past week respectively

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Source: Morpho Risk Pulse

Source: Aave Risk Pulse

Even though this was the largest single day liquidation event in crypto history, DeFi lending protocols performed exceedingly well with nearly no accrued bad debt. These liquidations were executed algorithmically and permissionlessly, highlighting the resilience and robustness of the DeFi ecosystem.

Source: Sentora Risk Radar

• The chart above shows how many blocks it took before open liquidations were executed

• Over the last seven days we can see the majority of liquidation volumes happened within 10 blocks (~120 seconds)

• The ability for lending protocols to execute these liquidations quickly and efficiently emphasize the benefits of smart contract based finance that operate without human intervention

Monitoring Concentrated Collateral on Lending Protocols

While lending protocols had outstanding performance during the flash crash, there are edge cases to monitor where market duress could surface. Specifically, lending markets with a high concentration of collaterals with lower market caps. This is more likely to happen in blockchains outside of the Ethereum ecosystem where the primary asset is the blockchains native token.

Source: Benqi Risk Radar

An example is in the Avalanche ecosystem where the AVAX token (and its LST derivatives) make up large amounts of the collateral used in lending markets. As the AVAX token dropped over 25% during the crash, this risks large liquidations events for lending platforms on the blockchain where liquidators do not liquidate due to low DEX liquidity or volatility being so high they can’t guarantee a profit.

Though lending protocols on Avalanche did not have issues, this is primarily due to the AVAX token still having a sufficiently large market cap. Blockchains with smaller market cap native tokens would likely be at higher risk. In general, users should always consider the following when lending into protocols:

• Collateral Concentration: how much of the borrows in a market use one collateral

• Collateral’s DEX liquidity: the depth of the collateral’s DEX liquidity is a major factor for liquidator profitability

• Collateral’s Market Cap: low market cap collaterals will have more volatility as large trades have a larger impact on price movement

DeFi Strategy Vault Protocols at Risk

A final risk to watch post flash crash are protocols where users deposit into a vault and the protocol implements various onchain and offchain strategies. The concern here is that many of these vaults are running basis trade strategies where they short an asset to earn funding rates while simultaneously holding the equivalent amount of spot to hedge the trade and be delta-neutral. However, given the market volatility and some perps markets implementing Auto-Deleveraging (explained in this article by Sentora CEO), these delta-neutral trades are imbalanced and not neutral anymore.

This is of significant importance for the protocols that are issuing stablecoins (often referred to as synthetic dollars in this context) based on the collateral in their vault being used in these trades. If their basis trades are not delta-neutral and the protocols don’t execute rebalances fast enough, this can lead to undercollateralized stables. 

Always check for transparency on positions and verify all onchain strategies when evaluating deployment into these types of protocols. When there is an offchain portion, there should be external party verifications that report the balances they hold off chain to ensure overcollateralization.

Feature Dashboard: Dolomite Risk Radar

Sentora has recently launched the Risk Radar dashboard for Dolomite on the Berachain. This allows Berachain users to monitor and evaluate risk scenarios when utilizing Dolomite’s lending markets. Check out the full suite of risk indicators here.

Monitor the Whales

Source: Dolomite Risk Radar

• Follow movements of the largest whales over time to see trends in inflows or outflows

• Pair this with exit simulations to determine risks to withdrawable liquidity being exhausted from the markets

• If a user is in a complex strategy that requires being able to exit their supplied liquidity immediately, large withdrawals from whales can signal an opportune time to exit

Analyze Borrow Rates

Source: Dolomite Risk Radar

• Track current and historical borrow rates for an asset

• Evaluate volatility and the impacts it would have on a given strategy over time when backtesting

• Download csv format of data to use in local models

Stay informed, manage risks wisely, and stay liquid

Disclaimer: This newsletter is for informational purposes only and should not be considered financial advice.