The sharp drop in the price of Ethereum (ETH) has caused significant fluctuations in the decentralized finance (DeFi) ecosystem. Falling by approximately 10% on Monday and currently hovering at $1,886 at 8:45 Turkish time today, ETH has reduced the value of assets used as collateral in DeFi protocols, triggering potential liquidations. This has increased risks, particularly for major credit platforms like Sky (formerly known as Maker).

FACING SIGNIFICANT DEFI CREDIT LIQUIDATION RISK
A DeFi loan based on $130 million worth of ETH collateral on the Sky platform faced the risk of liquidation despite the borrower committing an additional 2,000 ETH as collateral. According to the Sky Vault dashboard, the borrower accessed a $74 million loan using the DAI stablecoin by pledging a total of 65,680 ETH as collateral earlier today. With the drop in ETH prices, the liquidation level for this loan is now slightly above the $1,900 mark.

The decline in the price of ETH to $1,820 on Monday raised the risk of liquidation for the loan. According to data from the blockchain analysis platform Debank, the borrower withdrew around 2,000 ETH worth $4 million from the Bitfinex exchange on Monday morning and deposited it into the Sky platform. Even though this move lowered the liquidation level to ETH’s $1,875 price, the current market price remains below that level, continuing to pressure the loan.

WIDESPREAD LIQUIDATIONS EXPECTED IN THE DEFI ECOSYSTEM
The decrease in ETH prices not only impacts the large loan on Sky but also affects the overall DeFi market negatively. DefiLlama data shows there are $13.6 million loans at the liquidation level of $1,857 and $117 million worth of loans that will be liquidated at $1,780.

Additionally, it is estimated that if the price of ETH drops by another 20%, the amount of liquidated debt could reach $366 million. Liquidations in DeFi could create additional selling pressure by forcing the sale of collateral assets used in the liquidated loans, potentially leading to a further drop in ETH prices.

With ETH losing critical support levels, the crypto markets are speculating on a larger turmoil in the DeFi ecosystem. In particular, if the collateral levels of DeFi loans erode, chain reaction liquidations may occur in the market. Investors are closely monitoring ETH price movements in an attempt to mitigate potential risks.