Bitcoin’s price finally broke its previous all-time high on March 5th, surging past $69,200 and currently trading above $72,000. The last time BTC traded anywhere near this price level was in November 2021.

However, while this spike in price has definitely increased the net worth of spot BTC holders, not everyone is in a celebratory mood. Shortly after BTC touched its previous all-time high, there was a violent sell-off which saw the price tank by around 14%, triggering over $1 billion in liquidations across the larger digital asset market.

To some extent, this sell-off was anticipated given that Bitcoin’s notional open interest (OI) had soared by over 23,000 BTC within a span of a week. Additionally, the funding rates also hit levels last seen three years ago.

Nonetheless, even some of the best crypto traders could not resist the allure of adding leverage as BTC’s price nudged higher and higher. The result? A knife-catching contest that wiped out overleveraged positions within a span of hours.

Effective Risk Management in DeFi Lending and Borrowing

Similar to overly exposed margin trading and futures positions, open DeFi lending positions are also not spared when crypto prices take a sudden nosedive.

There have been multiple liquidation events, including the infamous MakerDAO liquidation on Black Thursday, when close to $8.3 million was liquidated after ETH’s price dropped by 45% while MakerDAO’s native token MKR plunged by almost 60% within a day.

To provide some more context, the total value locked (TVL) across DeFi lending platforms is currently at $36.61 billion, up from $22.2 billion at the beginning of 2024.

This growth is a testament that more and more crypto users are gradually returning to DeFi lending and borrowing platforms to put their idle capital to use.

However, while DeFi lending and borrowing platforms like Aave, Compound, and MakerDAO have opened up a new avenue to access loans by placing digital assets like ETH and WBTC as collateral, the caveat is that these DeFi loans are over-collateralized.

Borrowers can only secure a lower loan amount than the value of the collateral they put up; for example, MakerDAO’s minimum collateralization ratio is 150% (for ETH), which means a borrower looking to access a $100,000 DAI stablecoin loan would have to lock up $150,000 worth of ETH.

Although an effective way to protect DeFi lending protocols from becoming insolvent during, the over-collateralization requirement beats the logic of traditional loan structures where the loan-to-value ratio (LTV) is typically below 100%; in most cases, it is around 80%.

On the brighter side, there are several ways through which DeFi users can minimize their liquidation risks. One of them is by operating on lending platforms with a more friendly collateralization requirement. Nolus protocol is a great example of the DeFi lending platforms whose lending ecosystem is based on an undercollateralized model.

Built on the Cosmos SDK, this DeFi protocol borrows from the concept of traditional leasing, allowing borrowers to access a loan of up to 3x (150%) their collateral’s worth. Also, unlike typical DeFi lending platforms, Nolus’ DeFi lease model stores both the down payment and the loan provided in an automated smart contract to act as collateral, significantly reducing the risk of liquidation.

It is also advantageous to have enough gas fees, especially if you mostly trade on Ethereum. At the height of the DeFi bull run in 2021, Ethereum gas fees went as high as 500 Gwei. What this means is that if one wanted to instantly liquidate a losing position when the ETH blockchain was busy, yet they only had enough ETH to purchase 200 Gwei, then they were probably out of luck in closing the transaction swiftly.

Given that on-chain DeFi activity seems to be picking up again, having a good amount of ETH at any time could help you prevent all your assets from being liquidated when the network is too busy and everyone is likely looking to cash out.

DeFi lending and borrowing platforms also feature automated liquidation functions, which operate in a similar way to the limit or stop-loss orders on Central Limit Order Book (CLOB) exchanges. In fact, it was one of the pioneering functions integrated by DeFi lending platforms such as MakerDAO and Compound. Instead of stressing over every single candlestick, you can alternatively use the automated liquidation function to trigger partial liquidations and avoid your c-ratio from falling below the liquidation threshold.

Conclusion

The total crypto market capitalization is currently hovering around $2.8 trillion, slightly below its all-time high of $3 trillion, yet the interest in Bitcoin is still nowhere near the 2021 bull market levels according to Google Trends. Unfortunately, most of the time it is a zero-sum game. For every trade in profit, there is a countertrade in the red. The only way to make the most of a potential crypto bull market is by implementing effective risk management strategies to reduce one’s downside exposure in case of extreme liquidation events.

The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.

With Bitcoin hitting new highs on a weekly basis, dYdX stakers are earning hundreds of thousands of dollars in trading fees.

Stakers on the decentralised perpetual exchange earned an aggregate of $460,000 on March 5, the first time Bitcoin broke past its previous record high of $69,000.

In the last 30 days, all dYdX stakers have earned a total of $5 million, according to data from Mintscan. The fees were paid out in USDC, Circle’s US dollar-pegged stablecoin.

“We’ve done over $62 billion in trading volume over the last three weeks,” Tristan Dickinson, a dYdX Foundation spokesman, told DL News.

During that same period, Bitcoin and Ethereum have soared 51% and 60%, respectively.

Trading pairs

And with crypto markets showing no signs of slowing down, these fees for stakers are expected to keep growing.

DYdX typically handles around $1 billion in trading volume daily across 54 different trading pairs, according to CoinGecko.

Due to the design of dYdX’s new bespoke blockchain network, 100% of protocol fees from the dYdX chain go to dYdX chain stakers, Dickinson said.

Launched in 2017 on the Ethereum blockchain, dYdX rapidly grew in popularity but eventually ran into the network’s limitations.

Trading cryptocurrencies on Ethereum is often too expensive and slow to compete with centralised exchanges like Binance or Coinbase.

To meet demand, dYdX launched an independent chain in November using tools from another blockchain network called Cosmos.

Validators

Now, dYdX has native staking and its own group of validators — the machines that help verify crypto transactions. Users can stake the network’s native dYdX token with any validator.

The project is maintained by four entities: the dYdX Foundation, dYdX Trading Inc., the dYdX grants subDAO, and the dYdX operations subDAO.

A DAO, or a decentralised autonomous organisation, is an online group of token holders that can vote and make proposals to change a crypto protocol or approve grants.

With trading fees now distributed entirely to stakers, these four entities are funded by making proposals to their community and then, if those proposals pass, drawing from the community treasury.

Dickinson explained that the $230 million treasury was accumulated with fees from previous versions of dYdX. The dYdX community approved a $30 million grant to the foundation in February.

“We’re moving into this area model where eventually it’s going to be completely community-controlled and governed, and the funding comes from the treasury,” Dickinson said.

Stakers eye decentralised exchanges

Another decentralised exchange mulling a similar model is Uniswap.

Calling its version of the model the “fee switch,” the Uniswap community has waffled over whether holders of its native UNI token should also be allowed a slice of the platform’s trading fees.

The initial temperature check proposal passed nearly unanimously last week, moving it to the next stage of the governance process. Temperature checks are Uniswap’s first step in weighing community sentiment before making any sweeping changes.

With daily trading volumes over $3 billion and nearly $1.5 billion in accrued fees, flipping that switch would undoubtedly benefit UNI token holders.

Liam Kelly is DL News’ Berlin correspondent. Contact him at liam@dlnews.com.

Since a low in August, the total stablecoin market capitalisation has bounced back, rising by $20 billion to $146 billion.

This recovery marks a turnaround after the market faced considerable hurdles over the past couple of years.

Stablecoins are digital currencies designed to maintain a stable value by being pegged to a reserve asset, such as the US dollar, to minimise price volatility.

An increase in the stablecoin market capitalisation is considered to have a positive impact on the crypto markets as it indicates new money entering the system.

The biggest contributor to this growth is Tether’s USDT. Tether was able to increase its total supply by over 52% since August, surpassing $100 billion in total circulating supply on March 5.

Tether has said it is solvent and functioning as expected, according to its own attestation. But it has faced questions regarding whether it’s properly maintaining the funds to back the USDT stablecoin.

Still, some users believe that the increase in USDT’s supply was a result of its resilience over the last bear market, with the stablecoin maintaining its peg through serious market turbulence.

Coming onto the scene recently is Ethena’s synthetic dollar stablecoin USDe, exploding from under $5m in total circulating supply on December 10 to over $978 million today.

Ethena has a strong crypto native backing but also offers users significant yields on stablecoin deposits.

Ethena lets users mint USDe with about $1 in Ether, when typically stablecoins are over-collateralized. It also offers users a high yield on USDe deposits, currently just over a 67% annual percentage yield, in addition to a points campaign.

Points are given out by projects to users for interacting with a protocol, and are generally converted to tokens at a later date.

Popular decentralised exchange, Curve Finance, also launched a stablecoin in May of 2023, dubbed crvUSD. Since launching, the stablecoin has grown dramatically, just breaking an all-time high in circulating supply of $164 million on March 8.

The stablecoin from Curve uses a novel “soft liquidation” mechanism that is designed to reduce losses for users borrowing in volatile market conditions.

Disclaimer: The two co-founders of DL News were previously core contributors to the Curve protocol.

Ryan Celaj is DL News’ New York-based Data Correspondent. Reach out with tips at ryan@dlnews.com.