Crypto Credit System Under Fire After Market Sell-Off

The sudden crash of bitcoin and Ethereum triggered a series of historic liquidations on Coinbase, exposing a major vulnerability in crypto lending. Within hours, millions of dollars of collateralized loans were wiped out, revealing the limits of a system designed to withstand shocks. This new episode of tension, far from anecdotal, calls into question the robustness of financing mechanisms backed by cryptos.

Record liquidations on Coinbase: a system under pressure

On February 6, Coinbase experienced a critical event on its crypto-backed loan product via Morpho Blue. As the market collapsed with notable losses on bitcoin, liquidations followed one another at an unprecedented pace. More than 170 million dollars of collateral sold in one week, including 90.7 million within a few hours.

These loans, backed by bitcoin and Ethereum collateral, are automatically liquidated as soon as their coverage ratio falls below a predefined threshold. “Loans are automatically liquidated when they are no longer sufficiently collateralized”, explains the Morpho team.

This loan structure, although built to be permissionless and resilient, showed its limits in the face of a sharp drop in prices. Here are the technical elements to remember from this sequence :

• The Morpho Blue contract used by Coinbase alone represented about 90 % of the liquidations observed on the protocol, according to on-chain data ;

• Loans required a high over-collateralization rate, often above 130 %, to protect against price fluctuations ;

• The simultaneous drop of BTC (~-10 %) and ETH (~-26 %) was enough to trigger a series of forced sales, amplified by the automation of the system ;

• Liquidations were not absorbed gradually but occurred in bursts, increasing selling pressure on the market.

The mechanism, designed to secure creditors, acted as a catalyst for systemic stress. This phenomenon, although contained within Coinbase-specific contracts, could recur identically on other similar protocols exposed to crypto volatility.

Beyond Coinbase : a global market weakened by the domino effect

The liquidation series observed on Coinbase is not an isolated case. Since early February, the entire crypto market has faced a resurgence of volatility and high stress levels on derivative markets.

Bitcoin dropped below the 61,000-dollar mark, while Ethereum lost nearly 26 % of its value over the same period. This widespread decline triggered hundreds of millions of dollars in additional liquidations on other platforms, demonstrating a domino effect. Such an episode fits into a context of imbalance between leverage levels used by investors and the market’s actual liquidity.

The very structure of certain derivative products, combined with borrowing models excessively correlated with the bitcoin price, strengthens the system’s vulnerability. Observers also point to the rise of decentralized or semi-centralized credit products, whose collateral is exposed to the same market dynamics. In other words, when the price falls, everything falls.