DeFi leverage

Lioba Heimbach and Wenqian Huang

No 1171, BIS Working Papers from Bank for International Settlements

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.

Keywords: leverage; collateralised borrowing; decentralised finance; automated algorithm (search for similar items in EconPapers)
JEL-codes: G12 G23 O36 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-pay
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