Do liquidations discourage lending in DeFi?

Abstract

This article investigates the behavioural consequences of loan liquidations in the decentralized finance (DeFi) lending protocol Aave. Using a dataset of 25,798 liquidation events from March 2022 to December 2024, we analyse how being liquidated affects users’ subsequent activity. Despite the adverse shock of liquidation, we find that users generally continue to engage with the Aave platform at a higher frequency, albeit heterogeneous effects exist. These findings suggest that, unlike in traditional finance, where default often curtails future borrowing, DeFi usage persists even after liquidations. Our results have implications for the risk management and resilience of DeFi lending markets.