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DeFi leverage

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Listed:
  • Lioba Heimbach
  • Wenqian Huang

Abstract

In decentralized finance (DeFi), lending protocols are governed by predefined algorithms that facilitate automatic loans – allowing users to take on leverage. This paper examines DeFi leverage – ie the asset-to-equity ratio at the wallet level in major lending platforms. The overall leverage typically ranges between 1.4 and 1.9, while the largest and most active users consistently exhibit higher leverage than the rest. Leverage is mainly driven by loan-to-value requirements and borrowing costs, as well as crypto market price movements and sentiments. Higher wallet leverage generally undermines lending resilience, particularly increasing the share of outstanding debt close to being liquidated. Borrowers with high leverage are more likely to tilt towards volatile collateral when their debt positions are about to be liquidated.

Suggested Citation

  • Lioba Heimbach & Wenqian Huang, 2024. "DeFi leverage," BIS Working Papers 1171, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1171
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    leverage; collateralised borrowing; decentralised finance; automated algorithm;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O36 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Open Innovation

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