A classic deleveraging cascade is where falling prices trigger forced closures of leveraged positions especially long bets, creating additional selling pressure that pushes prices lower in a self-reinforcing loop.
What’s Happening Right Now
The crypto market has been experiencing sharp sell-offs, with Bitcoin dropping significantly recently testing lows around $60,000–$65,000 in some reports, down roughly 50% from late-2025 peaks.
Altcoins like Ethereum, XRP, Solana, and others have faced even steeper declines due to their higher beta and leverage exposure. In the past 24 hours, total crypto liquidations have ranged from $1.4 billion to over $2.4 billion across sources like CoinGlass.
Long positions dominate the damage such as the $1.24B–$1.92B in longs vs. far less in shorts, indicating over-leveraged bulls getting flushed out. As prices breach key support levels, exchanges automatically liquidate positions via market orders.
This floods the market with sell orders, accelerating declines and triggering more liquidations—creating the “cascade” effect. This follows extreme leverage buildup (futures open interest hit highs earlier), combined with risk-off sentiment, potential macro pressures and thinner liquidity amplifying moves.
Altcoins bore the brunt in one 24-hour window, with liquidations climbing rapidly from ~$428M in an hour to over $1.4B total. Specific assets like XRP saw sharp plunges from leverage unwinds and fading risk appetite.
Bitcoin and Ethereum extended declines overnight, with liquidations hitting hundreds of millions to billions in short bursts. This isn’t necessarily driven by fundamental “new” bad news but by mechanical unwinding of overextended positions.
Such events often “reset” the market by clearing excess leverage, potentially leading to more stable recoveries once spot buying from long-term holders dominates over forced selling. The market remains highly volatile—watch for stabilization signals like reduced liquidation volumes, open interest drops indicating deleveraging completion, or spot inflows.
The ongoing liquidation cascade in the crypto market, with over $2.5 billion in positions wiped out in recent days, has put significant stress on DeFi protocols. However, the sector has demonstrated notable resilience compared to previous downturns, with total value locked (TVL) declining primarily due to falling asset prices rather than mass user withdrawals.
DeFi’s TVL has dropped to approximately $93.2 billion, reflecting a -7.67% change in the last 24 hours and broader weekly/monthly declines of 15-40% across major protocols. This isn’t a full-blown capitulation but a macro-driven risk-off environment amplified by leverage unwinds.
Key effects include increased liquidations, reduced liquidity, and contagion risks, but also highlights of protocol maturity like automated liquidations without failures. DeFi liquidations spiked to $229.9 million over the past seven days, representing about 0.45% of TVL—elevated but well below stress thresholds from past cycles
This is a fraction of the broader market’s $5 billion+ in total liquidations since late January. Lending platforms like Aave, Morpho, Compound: These bore the brunt, with Aave alone handling over $140 million in collateral liquidations across networks without any protocol issues, showcasing improved risk management.
However, synchronized thresholds across protocols like Aave, Compound, Morpho, and Spark create contagion: a price drop triggers multi-protocol cascades, as seen in past events with $431 million liquidated in a day.
Ethereum faces particular pressure from a billion-dollar leveraged position at risk on Aave, where thin liquidity could accelerate unwinds. Liquid staking derivatives (LSDs) e.g., Lido, ether.fi: Hardest hit category, with Lido’s TVL down -31.6% weekly and -36.1% monthly to $18.5 billion.
Heightened ETH exposure and forced deleveraging of staked positions amplified losses, signaling risk aversion in yield-generating strategies. DEXes and Perp Platforms Forced selling dominated DEX volumes during the January 31-February 2 crash, creating a reflexive loop: price drops ? liquidations ? more selling ? further drops
On the positive side, platforms like Hyperliquid (HYPE) saw gains from surging trading fees and liquidations, positioning them as “defensive” assets in downturns. Other protocols like Binance staked ETH (-31.9% weekly to $7 billion) and EigenCloud (-31.7% weekly to $8.7 billion) reflect broad-based capitulation, with no safe havens emerging
TVL and Liquidity Dynamics
The 12% TVL drop (to ~$93 billion) is modest relative to the market’s 20-40% price declines in major assets like ETH (-21%) and SOL (-17%). This suggests users are holding through volatility rather than exiting, thanks to conservative loan-to-value (LTV) ratios learned from events like the 2025 “Tariff Tantrum”
Severe contractions in liquid staking (-30%+ weekly) and lending (-15-20% weekly). Broader liquidity pullback: Synchronized negative performance across categories indicates macro factors over protocol-specific flaws.
Unlike past winters, DeFi’s structure has matured: no widespread failures, with protocols like Aave and Maple proving robust under stress. Transparency in positions and thresholds allows for better monitoring, though it also exposes contagion risks.
Events like this “reset” excess leverage, potentially paving the way for recoveries once spot demand returns. However, if prices continue sliding like BTC toward $50K as some warn, DeFi could face deeper TVL erosion and more cascades. This isn’t financial advice—crypto remains high-risk, and users should monitor on-chain metrics closely. If you’re trading or holding, risk management is crucial in these environments.
