2000 character limit reached
Liquidity Risks in Lending Protocols: Evidence from Aave Protocol (2206.11973v4)
Published 23 Jun 2022 in q-fin.RM, cs.CR, q-fin.CP, and q-fin.TR
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.