DeFi protocols are facing a stress test amid the crash in the crypto market. Are they okay?

This article is from ChainNews, author: Pan Zhixiong.

After the government agency issued requirements for "cracking down on Bitcoin mining and trading activities" on the evening of May 21, the global cryptocurrency market experienced a continuous two-day severe fluctuation, with mainstream coins dropping as much as 30% in a single day, and many other coins even falling over 50%.

In fact, the market had already begun to undergo significant adjustments starting from May 19. Under such extreme pressure testing, it was also a good opportunity to observe the operational efficiency of the DeFi (Decentralized Finance) system—especially when the amount of funds participating in this system once broke the milestone of 100 billion USD, with some assets still undergoing over-collateralization or executing leveraged trades.

The dramatic fluctuations in the market over the past weekend were a rare large-scale and high-volatility black swan event since last year's March 12 (Black Thursday). On March 12 last year, the cryptocurrency market experienced a flash crash, with the most significant impact being on the on-chain "central bank" Maker system's liquidation engine, which encountered some issues. Fortunately, it was later restored through auctions and improved protocol designs. During this recent market volatility, MakerDAO did not encounter the same problems.

However, at the time of last year's March 12, DeFi had not yet become mainstream and was not a well-known direction in the industry, as the liquidity mining craze had not yet begun. Today, the changes in the DeFi world are rapid, and the complexity of DeFi operations has far exceeded that of the past.

In this context, after experiencing significant market fluctuations again, we hope to summarize some macro data from the DeFi world, combined with data from some core DeFi protocols during this weekend's market volatility, to clearly understand how these DeFi protocols performed during this black swan event triggered pressure test.

Overview of the Overall Performance in the DeFi Field

Total Value Locked (TVL) in DeFi: Nearly Halved

TVL is one of the core indicators used to assess the overall scale of the DeFi world, and its data can represent the liquidity situation in the on-chain financial world.

According to DeBank data, the total locked value (TVL) of DeFi protocols across all blockchain networks dropped from 130 billion USD on May 11 to a low of 67 billion USD within 12 days, nearly halving (-48%).

DEX Trading Volume: Historical High

Generally speaking, volatile markets tend to promote an increase in trading volume, as DEX may be used for arbitrage or liquidation trades, and many on-chain native users may seek refuge through DEX.

During the market crash on May 19, the cumulative trading volume of all DEX reached a historical high for daily trading volume, approaching 22 billion USD.

Collateralized Lending Data: Nearly Halved

Currently, almost all blockchain-based lending protocols are realized through asset collateralization, and the collateral is based on highly volatile crypto assets, so as the market fluctuates, its borrowing data may also be severely affected.

From on-chain data, the total borrowing amount dropped from a historical high of 26.7 billion USD to 15 billion USD, a decrease of 44%, which is comparable to the market's decline level.

Collateralized Lending Liquidation Data: Historical High

When crypto assets experience significant fluctuations, lending protocols may trigger liquidations due to the price volatility of collateral, so liquidation data also reflects part of the market's leverage situation. Of course, high liquidation data does not mean that DeFi protocols have problems, as long as these liquidations do not result in bad debts or non-performing loans.

On May 19 and 23, the highest and second-highest on-chain liquidation amounts in history were recorded, with single-day liquidation amounts of 614 million USD and 140 million USD, respectively. Additionally, on May 19, Venus on BSC suffered a large amount of bad debt due to issues with the system's collateral rate design, resulting in over 250 million USD in liquidation.

Gas: Relatively Stable

The Gas on the Ethereum chain has been relatively stable in recent days, although on May 19, it experienced a momentary spike of over 1500 Gwei, possibly due to bots bidding for Gas during liquidation auctions or users conducting rapid trades during market fluctuations. However, the daily median was only 181, which is lower than the level on May 11 (306 Gwei), and it gradually decreased in the following days.

This may be related to Ethereum's recent increase in block capacity, which reduces the impact of increased transaction volume on block Gas, or it could be due to the increasing number of miner nodes deploying Flashbots, which can reduce Gas bidding in MEV.

Stablecoins: Continuous Growth

Stablecoins backed by fiat currencies or assets continue to grow (often referred to as compliant stablecoins, although there is considerable controversy surrounding USDT), and there has been no outflow from the blockchain or DeFi system due to the market's severe fluctuations, with an overall scale of 63.4 billion USD.

Oracle Calls: Close to Historical High

Oracles represent the frequency at which on-chain DeFi and other businesses require off-chain or price data, so during periods of significant price fluctuations, the number of oracle calls also increases significantly. Although it is not a historical high, it ranks among the top three in history, with over 35,000 calls in a single day.

Synthetix

Synthetix is a synthetic asset protocol realized through extremely high collateralization rates. The protocol's native token SNX can mint various synthetic assets like sUSD with a collateralization rate of 5 to 10 times, simulating the value fluctuations of real-world or other cryptocurrency assets.

However, due to its extremely high collateralization rate, the protocol's capital efficiency is relatively low. Even so, many still question the sustainability of the Synthetix model. Fortunately, during the recent market conditions, Synthetix did not experience a crash or spiral decline.

Data from on-chain, DeBank, and CoinMarketCap shows that Synthetix's operations have not encountered significant problems in the past few days, corresponding to the overall market fluctuations, with TVL dropping from a previous high of 3.8 billion USD to 2 billion USD, a decline of about 47%.

From the perspective of Synthetix's core stablecoin, sUSD, although the volatility is slightly higher, the worst decoupling situation only saw a momentary price difference of around 7%, maintaining an overall level of around 1 USD.

Another important data point is the collateralization rate. According to the official data platform of Synthetix, the collateralization rate currently remains at 520%, and other project data also maintains a relatively safe level.

Data source: https://stats.synthetix.io

Maker

"On-chain central bank" Maker encountered issues with its liquidation system on March 12 last year, but it has performed well during the recent market fluctuations, indicating that the team's adjusted system design has resolved the issues present last year.

The issuance of DAI is currently about 4.4 billion USD, while the total amount of collateral assets in the entire system is close to 7.5 billion, with an overall collateralization rate of about 170%.

From the liquidation data, Maker liquidated over 41 million USD on May 19, setting a new historical high. These liquidations are part of the normal business logic, and so far, there have been no bad debts like those during March 12.

Additionally, from the price of the dollar stablecoin DAI issued by Maker, it is more stable than Synthetix's sUSD, with lower volatility, maintaining a price around 1 USD.

Terra

The performance of the dollar stablecoin UST issued by Terra has been less than satisfactory, experiencing the most severe decoupling since UST's issuance, with UST dropping to a low of 0.93 USD and still not fully recovering.

Compared to several other on-chain collateralized stablecoin protocols, the mechanism of UST issued by Terra is different, relying partly on Terra's native token LUNA, making it an algorithmic stablecoin supported by LUNA. It is worth noting that as the market fluctuates, LUNA's market capitalization has fallen below that of the stablecoin UST—many market commentators point out that this could lead to a spiral decline of both assets: if users choose to panic sell UST, LUNA would collapse even faster.

LUNA's price has halved in the past seven days but has seen some rebound, possibly due to a change in market conditions or the team's support with substantial funds to bring UST back to 1 USD. The cryptocurrency community is paying close attention to the future of UST, with many opinions suggesting that these endogenous collateral stablecoin protocols carry significant risks and may need to consider implementing some additional buffer measures to cope with severe market fluctuations.

Float

As a new generation of non-pegged dollar algorithmic stablecoin, Float just completed its founding issuance last week but faced unfortunate circumstances, encountering severe fluctuations in the ETH market right from the start—it's important to note that Float initially used ETH as collateral, so it was significantly affected.

The good news is that from Float's price performance, its issuance price was 1.618 USD, and although there were price fluctuations, it successfully launched and completed daily auction activities, maintaining the price at the target level through these daily auctions. Of course, Float did drop to around 1 USD at its lowest.

Overall, Float does not resemble a "stablecoin"; its current role is more like absorbing the volatility of collateral (ETH) through governance tokens BANK and auction mechanisms, providing a relatively stable asset.

Perpetual Protocol

The derivatives leverage trading protocol Perpetual Protocol, deployed on the Ethereum sidechain xDAI, is also one of the representative trading applications. A month ago, it experienced a flash crash or "wick" in prices due to severe fluctuations in the ETH market, with prices nearly 1000 USD lower than centralized exchanges.

However, during this market situation, it can be seen from the K-line chart that there were no significant wicks.

This may be because, after the last incident, Perpetual Protocol proposed comprehensive improvement measures for the issue, including providing more depth, setting limits on opening positions, and launching partial liquidation mechanisms. Therefore, from this pressure test, Perpetual Protocol has shown significant improvement.