Template-Type: ReDIF-Paper 1.0
Author-Name: Lioba Heimbach
Author-X-Name-First: Lioba
Author-X-Name-Last: Heimbach
Author-Name: Wenqian Huang
Author-X-Name-First: Wenqian
Author-X-Name-Last: Huang
Title: DeFi leverage
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.
Creation-Date: 2024-03
File-URL: https://www.bis.org/publ/work1171.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1171.htm
File-Format: text/html
Number: 1171
Keywords: leverage, collateralised borrowing, decentralised finance, automated algorithm
Classification-JEL: G12, G23, O36
Handle: RePEc:bis:biswps:1171