Liquidity Risks in Lending Protocols: Evidence from Aave Protocol
Risk Management
2023-05-01 v4 Cryptography and Security
Computational Finance
Trading and Market Microstructure
Abstract
Lending Protocols (LPs), as blockchain-based lending systems, allow any agents to borrow and lend cryptocurrencies. However, liquidity risks could occur, especially when salient loans are initiated by a particular group of borrowers. This paper proposes measurements of liquidity risks, focusing on both available liquidity and market concentration in LPs. By using Aave as a case study, we find that liquidity risks are highly volatile and show complex effects on Aave, and liquidity in Aave may affect across on-chain lending market. Compared to new users, regular users that repeatedly borrow cryptocurrencies may negatively affect Aave protocol, implying that user loyalty is a double-edged sword for LPs.
Keywords
Cite
@article{arxiv.2206.11973,
title = {Liquidity Risks in Lending Protocols: Evidence from Aave Protocol},
author = {Xiaotong Sun and Charalampos Stasinakis and Georgios Sermpinis},
journal= {arXiv preprint arXiv:2206.11973},
year = {2023}
}