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Liquidity Risks in Lending Protocols: Evidence from Aave Protocol

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  • Xiaotong Sun
  • Charalampos Stasinakis
  • Georgios Sermpinis

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.

Suggested Citation

  • Xiaotong Sun & Charalampos Stasinakis & Georgios Sermpinis, 2022. "Liquidity Risks in Lending Protocols: Evidence from Aave Protocol," Papers 2206.11973, arXiv.org, revised Apr 2023.
    • Handle: RePEc:arx:papers:2206.11973
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    File URL: http://arxiv.org/pdf/2206.11973
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