- Research shows DeFi borrowers often return to borrow more after liquidation events.
- Traditional finance borrowers typically face setbacks after defaults, unlike in DeFi.
- Study analyzed nearly 26,000 liquidation cases on the Aave platform from March 2022 to December 2024.
- DeFi lending activity has reached over $125 billion, increasing by 62% since the start of the year.
- Strict collateral rules and the absence of long-term penalties encourage persistent engagement in DeFi lending.
Borrowers in decentralised finance (DeFi) are not discouraged from borrowing again when their assets are liquidated, according to a study by researchers Gregory Gadzinski and Vito Liuzzi from the International University of Monaco. Unlike traditional lenders, who often stop borrowing after defaulting on loans, DeFi users tend to return to lending protocols and sometimes even increase the frequency of their transactions.
The study reviewed nearly 26,000 liquidation events on the Aave lending platform between March 2022 and December 2024. During this period, DeFi lending activity hit an all-time high, with the value of assets locked in lending protocols rising to over $125 billion, reflecting a 62% growth since the start of the year.
Researchers observed that after liquidation, major borrowers carried out transactions more often but at lower volume, while smaller borrowers reduced their transaction frequency but maintained the size of their loans. Gadzinski and Liuzzi stated, “Despite the adverse shock of liquidation, we find that users generally continue to engage with the Aave platform at a higher frequency.” They also noted, “Even after large market dislocations leading to heavy liquidations, the lending platform Aave did not experience a user exodus; engagement metrics rose.”
DeFi lending operates differently from traditional finance. Loans are over-collateralised, meaning users must deposit more value in cryptocurrencies like Bitcoin or Ethereum than they borrow, often using stablecoins such as USDC. If the value of the collateral drops significantly, the platform automatically liquidates those holdings to avoid unpaid loans. The borrower still keeps the borrowed funds even if their deposited assets are liquidated.
The researchers concluded that DeFi users are often yield-seeking traders familiar with risk and do not face lasting penalties similar to a damaged credit score in traditional banking. They treat liquidations like routine market adjustments instead of financially damaging events. More information about lending protocol statistics can be found on DeFiLlama’s lending protocols page, and the full study is available in Economics Letters.
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