Ethereum’s on-chain lending ecosystem has reached a new milestone, with active loans surpassing $28 billion as of January 2026.
Central to this growth is Aave, the leading Ethereum-based lending protocol, which controls approximately 70% of the network’s active lending market.
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Aave’s Automated Liquidations Prevent DeFi Contagion Amid Weekend Crash
Data on Token Terminal shows that the growth in active loans across Ethereum-based lending platforms achieved a tenfold increase from January 2023 lows.
Active loans across lending platforms on Ethereum. Source: Token Terminal on XThis milestone highlights Ethereum’s continued dominance in DeFi. It gives it a roughly tenfold advantage over competing networks such as Solana and Base.
The surge in lending activity, while a signal of DeFi’s expanding adoption, also raises questions about systemic risk.
In 2022, elevated loan volumes contributed to waves of liquidations that exacerbated broader market downturns. By Q3 2025, crypto lending had reached a record $73.6 billion. This represents a 38.5% quarter-over-quarter increase, and nearly tripling since the start of 2024.
According to Kobeissi analysts, this was driven largely by DeFi protocols benefiting from Bitcoin ETF approvals and a sector-wide recovery.
While leverage in DeFi remains far below that in TradFi sectors—representing just 2.1% of the $3.5 trillion digital asset market, compared to 17% in real estate—its concentration in algorithmic lending platforms like Aave amplifies the potential for rapid, automated liquidations.
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Weekend Crash Highlights Aave’s Role as DeFi’s Stabilizer Amid $2.2 Billion Liquidations
The late January 2026 weekend market crash tested this system under extreme stress. Bitcoin dropped sharply from around $84,000 to below $76,000 amid:
- Thin weekend liquidity
- Geopolitical tensions in the Middle East, and
- Pressure from the US government funding uncertainties.
Over $2.2 billion in leveraged positions were liquidated across centralized and decentralized exchanges in just 24 hours.
Aave’s infrastructure played a crucial stabilizing role. The protocol processed over $140 million in automated collateral liquidations across multiple networks on January 31, 2026.
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Despite high Ethereum gas fees spiking above 400 gwei, which temporarily created “zombie positions” where undercollateralized loans hovered near liquidation thresholds but could not be profitably cleared immediately, Aave handled the surge without downtime or bad debt.
Aave’s performance prevented what could have been a far more severe contagion across DeFi. Had the protocol failed, undercollateralized positions could have accumulated into bad debt. Such an outcome would trigger cascading liquidations and potential panic across the ecosystem.
Other protocols, including Compound, Morpho, and Spark, absorbed smaller liquidation volumes. However, they lacked the scale or automation to fully replace Aave.
Lending Protocols by Ranking. Source: DefiLlamaEven large ETH holders, like Trend Research, who deleveraged by selling hundreds of millions of dollars in ETH to repay Aave loans, relied on the protocol’s efficiency to mitigate further market stress.
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The weekend crash highlights both the opportunities and vulnerabilities inherent in Ethereum’s lending ecosystem.
While active loans and leverage are rising, Aave’s resilience signals that DeFi’s infrastructure is maturing.
The protocol’s ability to absorb large-scale liquidations without systemic failures highlights Ethereum-based lending as a stabilizing force in volatile markets. It reinforces its “flight-to-quality” reputation among both institutional and retail participants.
AAVE Price Performance. Source: BeInCryptoDespite this bullish outlook, the AAVE token is down by over 6% in the last 24 hours, and was trading for $119.42 as of this writing.
Source: https://beincrypto.com/crypto-lending-leverage-liquidation-risk/
