Record Liquidations Hit Coinbase’s DeFi Loans as Bitcoin and Ethereum Slide

Coinbase’s onchain lending experiment just met a real market drawdown. As Bitcoin and Ethereum sold off, liquidations on the exchange’s crypto‑backed loans set a new high, underscoring the speed—and the harshness—of DeFi credit when volatility spikes.

Key figures from the past week: - $170 million in collateral liquidated via Morpho, per a Dune dashboard. - $90.7 million wiped on Thursday alone across roughly 2,000 users. - Around 3,300 users did not intervene as their BTC and ETH was seized. - Bitcoin fell 17% and Ethereum 26% over the week.

Coinbase rolled out access to Bitcoin‑backed loans last year, later adding Ethereum and lifting per‑user limits to $5 million. Since launch last January, originations have reached $1.8 billion. The promise was familiar: unlock liquidity without selling core holdings. The reality this week: once loans flipped “unhealthy,” third parties repaid balances onchain and acquired collateral at a discount, as designed. Some borrowers topped up collateral or repaid in USDC to avoid that fate; many did not or could not react in time.

The core issue isn’t the presence of leverage—it’s the liquidation clock. Morpho’s pools are over‑collateralized by default, and Coinbase says its app adds an extra buffer at origination, with frequent warnings “up to every 30 minutes” as thresholds approach. That cadence can still lag the market. Liquidation bots monitor price feeds continuously; they execute in seconds when collateral ratios breach. Retail users juggling work, sleep, or transfer delays face a structural disadvantage. In negative momentum, that gap widens: borrowers hesitate to sell coins they intended to keep, or they lack stablecoin liquidity on the right chain, and a small delay turns into a full loss of collateral.

This is where product intent meets behavior. Marketing a loan as a way to “grow wealth” invites borrowers to treat it like a revolving line against a blue‑chip asset, not a margin position with abrupt downside. When prices were near an all‑time high above $126,000 in October, Coinbase’s consumer lead highlighted use cases like buying a car or renovating a home without selling Bitcoin. That framing resonates, but it can dull the perceived urgency to manage LTV during drawdowns. This week showed the opposite dynamic: pro‑cyclical selling via automated liquidations, with limited room for discretion once thresholds trip.

Operationally, Coinbase notes: - It doesn’t collect fees from user liquidations. - It earns as a technology provider by taking a share of performance fees paid to risk managers. - It’s exploring additional borrower protections. - Notifications are frequent, and loans are over‑collateralized with an in‑app safety buffer.

Those choices align with the company’s push to become an “everything exchange,” integrating DeFi rails rather than running centralized margin desks. It previously halted centralized Bitcoin‑backed loans in May 2023 amid heightened regulatory scrutiny. The current setup lets participants extend credit onchain without supplying personal information before lending to Americans, which simplifies access while shifting more discipline to the end user. That trade moves faster capital formation and cheaper execution to the forefront—but when markets gap, the same efficiency accelerates loss realization.

The path forward isn’t mystery: better tooling around pre‑set auto‑repay from USDC balances, dynamic LTV bands that tighten in high volatility, and clearer default settings for top‑up sources could help. Coinbase’s mention that it’s evaluating more protections is the right direction. Still, the design will always favor entities that respond programmatically over humans reacting by push notification.

If crypto prices were to drop another 50% from here, potential user losses could reach $600 million by the product’s own risk math. That estimate may never be tested, but it frames the leverage embedded in what often feels like a convenience feature. Onchain credit is fast, cheap, and efficient—until it isn’t. Borrowers who used these loans to avoid selling core BTC or ETH learned how quickly that choice can be reversed for them when markets turn.