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Do liquidations discourage lending in DeFi?

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  • Gadzinski, Gregory
  • Liuzzi, Vito

Abstract

This article investigates the behavioural consequences of loan liquidations in the decentralized finance (DeFi) lending protocol Aave. Using a dataset of 25,798 liquidation events from March 2022 to December 2024, we analyse how being liquidated affects users’ subsequent activity. Despite the adverse shock of liquidation, we find that users generally continue to engage with the Aave platform at a higher frequency, albeit heterogeneous effects exist. These findings suggest that, unlike in traditional finance, where default often curtails future borrowing, DeFi usage persists even after liquidations. Our results have implications for the risk management and resilience of DeFi lending markets.

Suggested Citation

  • Gadzinski, Gregory & Liuzzi, Vito, 2025. "Do liquidations discourage lending in DeFi?," Economics Letters, Elsevier, vol. 255(C).
    • Handle: RePEc:eee:ecolet:v:255:y:2025:i:c:s016517652500374x
    DOI: 10.1016/j.econlet.2025.112537
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    References listed on IDEAS

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    1. Ana Sasi-Brodesky & Iota Kaousar Nassr, 2023. "DeFi liquidations: Volatility and liquidity," OECD Working Papers on Finance, Insurance and Private Pensions 48, OECD Publishing.
    2. Alfred Lehar & Christine A Parlour, 2022. "Systemic fragility in decentralised markets," BIS Working Papers 1062, Bank for International Settlements.
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    4. Phoebe Tian & Yu Zhu, 2025. "Liquidation Mechanisms and Price Impacts in DeFi," Staff Working Papers 25-12, Bank of Canada.
    5. Saengchote, Kanis, 2023. "Decentralized lending and its users: Insights from compound," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    6. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
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