The decentralized finance (DeFi) ecosystem teetered on the brink of a meltdown yesterday as cascading liquidations swept through the market following a sharp drop in Ethereum (ETH) price. Over $5.4 million in collateralized assets were forcibly sold off in a 24-hour period, raising concerns about the stability of the DeFi house of cards.

Ethereum, the world’s second-largest cryptocurrency by market capitalization, bore the brunt of the liquidations. Its price plummeted over 9% to below $3,200, a far cry from its recent high of $4,092.

This price swing triggered a domino effect, as collateralized loans used to amplify returns in DeFi protocols faced margin calls. Data from Parsec paints a bleak picture, with a potential $24 million liquidation event looming if ETH price dips further to $3,008.

To make matters worse, within the same time frame, major on-chain derivatives have triggered liquidations totaling more than $52 million. After selling at a high of $4,100 for Ethereum, short traders recouped their losses by repurchasing the cryptocurrency at $3,200.

The pain wasn’t shared equally, however. Panic selling by long position holders, those betting on an ETH price increase, resulted in a whopping $104 million in liquidations compared to a  little over $16 million for short sellers. This imbalance could exacerbate the ETH price decline, creating a negative feedback loop.

The situation highlights the inherent risks associated with leverage in DeFi protocols, While leverage can magnify profits, it can also amplify losses, especially during periods of high volatility.

The bloodbath wasn’t confined to the DeFi space. The broader crypto market experienced heightened volatility as investors braced for the upcoming Federal Open Market Committee (FOMC) meeting. The potential for a Federal Reserve interest rate hike, coupled with weak inflows into Spot Bitcoin ETFs, cast a shadow of bearish sentiment across the digital asset landscape.

Currently, Ethereum (ETH) is experiencing a decline of nearly 10% and is currently trading at $3,138. The 24-hour trading volume for ETH stands at $29 million.

Ethereum had a 20% retracement, making it the second most significant decliner among the top 10 cryptocurrencies. ETH traders maintained their sense of confidence by retaining and mitigating their positions in anticipation of an impending period of recovery.

Based on the prevailing market indicators, it is plausible that the price of Ethereum may evade more drops in the foreseeable future, as the bullish sentiment seeks to consolidate at the support level of $3,200, thereby establishing a foundation for a subsequent phase of recuperation.

Featured image from Pexels, chart from TradingView

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