According to report According to data analytics firm IntoTheBlock, venture lending volumes on the leading Aave protocol are at a high, while overall lending volumes in the DeFi space are at multi-year highs. This development is believed to be due to investors seeking different investment strategies to maximize profits in the expected cryptocurrency boom.

Aave high-risk loans 5% below liquidation threshold

In my weekly newsletter On June 8, IntoTheBlock highlights that DeFi lending is currently estimated at $11 billion, which is the highest value recorded in the last two years. As the largest lending protocol, Aave accounts for over 50% of these numbers, with approximately $6 billion borrowed by its users.

Notably, $1 billion of this debt is classified as high-risk loans, which are secured by floating collateral. Currently, these loans involve significant risk and the value of their underlying assets does not exceed 5% of the established liquidation threshold.

For context, a margin call level or liquidation threshold is a predetermined point at which the value of an asset declines to a level at which the lender or broker requires the borrower to boost collateral in order to maintain the loan or position. Failure to meet this requirement may result in automatic liquidation of the security.

When underlying assets fluctuate around this critical threshold, as is the case with Aave’s high-risk loans, any tiny decline can lead to widespread liquidations. This usually results in the borrower losing such assets. However, under certain conditions, when there is a piercing drop in price, the borrower may incur additional losses, which may be transferred to the balance of his account on the lending platform.

Additionally, the liquidation of these high-risk loans could boost market volatility, which could result in greater price losses, leading to more liquidations in a downward spiral. Additionally, the simultaneous liquidation of multiple assets may create liquidity issues that may prevent the glossy operation of the Aave protocol.

AAVE price overview

Meanwhile, AAVE fell by 5.30% in the last day after encountering major resistance at the $98.20 price zone. The DeFi token is currently trading at $92.30 after overall negative performance last week, causing the price to drop 11.53%.

However, according to Coincodex price prediction site, the overall sentiment around AAVE remains positive. The Coincodex team is backing AAVE in a remarkable comeback, hitting a price of $303.87 over the next month.

Featured image from LinkedIn, chart from Tradingview