Risk-first approach to defi

Below is guest posting and analysis by Vincent Maliepaard, Marketing Director at IntotheBlock.

Defi has matured into a complex web of lending markets, Stablecoin ecosystems and liquidity pools. This growth comes with a wide range of opportunities, but new forms of risk can suddenly appear and requires important expertise to navigate effectively.

The complexity and volatility of the Defi market

The Defi market has grown significantly over the past few years, with the total currently totaling around $88 billion. However, the space is also fragmented, with hundreds of defi protocols across different chains, some with a strong user base and excellent track record, others with newer designs. This complexity requires a well-thinkable risk management framework that takes into account the most common economic risks in a variety of ways. To help you get into the right mindset, consider some of the major risk events that may occur.

Sudden fluidity crunch: In times of market stress, lenders often try to withdraw funds and spike their use in the lending pool. For example, in March 2023, Aave’s DAI market approached 100% utilization, causing a sharp rise in interest rates, tempting repayments and new deposits. barely Avoided fluid crunch. Without such intervention, users could have stayed in the pool, but they may not have been able to withdraw as liquidity depleted.Stablecoin Depegs: stablecoins can Lose the peg There are few warnings and they send shockwaves through the market. A notable case occurred on April 2, 2025. This is First Digital USD (FDUSD) – usually 1:1 fixed to dollar – It fell sharply to $0.93 After a bankruptcy filing against the issuer. Such DEPEG events not only erode trust, but also rely on its Stablecoin to threaten protocols and liquidity pools (for example, causing imbalances in curve pools and panic elicitation).Cascade liquidation: A sudden drop in price for key assets can lead to liquidation of chain reactions across lending platforms. A drop in prices will rewind leveraged positions. For example, in the 2020 “Black Two-Sun” crash, a daily 50% drop in ETH even led to a wave of liquidation. Protocol insolvencies.

These examples show how quickly things don’t work if you’re not on top of the broad range of risk metrics related to your position. Emphasises sudden liquidity shortages, peg breakages, and the need for mass liquidation Continuous detailed risk monitoring. In a fast-moving market, Timing is everything – By the time the average investor reacts to Twitter rumors and price charts, the damage may already be incurred.

Discover risks early in Aave

One of Defi’s biggest money markets, Aave is an important protocol for monitoring when determining potential risks in the market. If you’re a Defi institutional investor, you’re likely deploying capital into the protocol. However, a strong position in the protocol is important when looking at potential risk events in the broader market, even if they are not deployed to Aave. Let’s take a practical example of how to monitor risk with Aave.

Risky Loan Alerts with Aave

We can classify each Aave loan by health factor (based on collateral versus obligation). When that health factor approaches 1.0 (clearing threshold), the loan is at a higher risk of being liquidated.

The sudden increase in high-risk loans is the result of extreme price movements, resulting in lower collateral on loans. If this is important enough, you can force liquidation as mentioned above, and even create a cascade liquidation. Continuous monitoring of the volume of high-risk loans is somewhat unrealistic, but it is still essential. Tools like Intotheblock’s risk pulse It will help you find these conditions automatically, as shown in the example below.

See the flow of fluidity

Another important signal for Aave is the big moves in and out of assets into the protocol. Liquidity flows, particularly the peaks of untlfows, can indicate risk conditions. For example, Weth’s massive withdrawal from Aave might suggest that whales are pulling collateral probably due to concerns about market volatility or to deploy elsewhere.

This sudden spill can tighten the liquidity available on Aave. If many Weths are taken away, the liquidity of Weths to borrow will be less, and the remaining Weth usage could potentially shoot and increase interest rates.

Conversely, a surge in Wes deposits could temporarily increase Aave’s liquidity, indicating that major players are preparing to provide or provide collateral for borrowing.

See the flow of fluidity

Another important signal for Aave is the big moves in and out of assets into the protocol. Liquidity flows, particularly the peaks of untlfows, can indicate risk conditions. For example, Weth’s massive withdrawal from Aave might suggest that whales are pulling collateral probably due to concerns about market volatility or to deploy elsewhere.

This sudden spill can tighten the liquidity available on Aave. If many Weths are taken away, the liquidity of Weths to borrow will be less, and the remaining Weth usage could potentially shoot and increase interest rates.

Conversely, a surge in Wes deposits could temporarily increase Aave’s liquidity, indicating that major players are preparing to provide or provide collateral for borrowing.

Both scenarios have an impact. A decline in liquidity increases the risk of higher slippage and not being able to withdraw others, but a large influx can precede an increase in borrowing (leverage in the system).

Curve: Depeg alerts and market depth changes in Stablecoin pool

Another major Defi protocol is curves. Curves are the backbone of stability liquidity in defi, where users host pools where they trade and stake Starbull Coins and other pegged assets. By design, a curve pool is a stable swap pool for keeping assets at equal values, and is immediately concerned about DEPEG events or imbalances. Curve risk monitoring focuses on PEG stability and market depth. Essentially, do assets in the pool hold their expectations? Are there sufficient fluidity on both sides of the pool?

DEPEG Risk

When the curve pool token drifts from the intended PEG, the LPS will feel the impact for the first time. A small price deviation will quickly spiral into the pool’s imbalance. When others leave, deleted assets flood the pool and LPS holds the risky side.

Recent events like FDUSD’s DEPEG on April 2, 2025 highlight the importance of rapid detection. As red spurts occur and rumors spread, the curve pool, which is high in FDUSD, is sharply distorted. The LPS was not aware that it was being ignored.

An initial alert (e.g. FDUSD <$0.98) flagging initial drift would have given time to hedge the LPS.

And it’s more than just a Fiat stable. Stakehold tokens like sdpendle also show curve dislocations. If these wrappers slide over prices and underlying assets, their share in the pool could rise. This is a signal that the risk of LP is rising rapidly.

Fluidity depth as a signal

The risk of a curve is not just price, but depth. As fluidity in the pool becomes less, slipping worsens and constrains the ability to replace it. Therefore, it is important to monitor for sudden changes in pool fluidity. There are several reasons why it may suddenly change into liquidity. The most obvious answer is that market events like extreme price movements create uncertainty and people withdraw liquidity.

A factor that is often less explored is that pool liquidity can consist of a small number of large providers. This means that only a few entities that withdraw can significantly alter the depth of the market and be exposed to risk.

For funds that manage liquidity on curves, real-time alerts combining large transactions with depth changes are important. They provide the opportunity to evict, rebalance or deploy capital to stabilize the pegs. Before the rest of the market catches up.

Whale concentration: Large players moving through the market

One recurring theme in the discussion above is the large impact of whale investors, entities, or addresses that control very large positions. Whale behavior can accurately move markets and distort liquidity due to scale.

Analyses of the chain reveal the risks of these “whale concentrations” by flagging a pool dominated by several large lenders. If three addresses provide half the liquidity of the pool, that pool is fragile. The first whale at the exit can lock everyone else until the fresh capital arrives or high fees force borrowing or repayments.

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