The crypto market opened the year under mounting leverage stress as risk exposure built steadily across derivatives. Through mid-January, $550 million in long liquidations pushed Bitcoin [BTC] towards $86,000, exposing structural fragility.
However, pressure intensified on 29 January 2026 when BTC fell to $84,000 amid $1 billion in forced liquidations. Conditions then worsened in early February, with a 33% drop from $90,000 to $60,000 within just 72 hours – Triggering broad margin calls.
However, the liquidation map did reveal a structural shift. As BTC moved near $64,000, cumulative short liquidations expanded while long liquidations thinned. Notably, a drop below $58,000 triggered only $670 million in longs, far below prior cycles.
Even the break above $70,000 produced $2.6 billion in short squeezes—muted versus 2021–2024 cascades. This suggested that leverage has largely reset itself. While the selling pressure has eased, the demand has remained gradual – Indicative of sideways accumulation before recovery.
From market shocks to multi-chain unwinds
Liquidations on Aave [AAVE] intensified when external shocks hit crypto prices.
In May 2021, China’s crypto bans and Tesla’s environmental concerns triggered a market collapse, driving about $362 million in liquidations across 5,500 positions.
Selling pressure returned in June 2022 as the LUNA collapse forced over 32,000 positions to liquidate, though at a lower total volume near $200 million. Stress then resurfaced on 10 October 2025 when a sudden crash cleared over $250 million in a day.
More recently, from 31 January to 05 February, capitulation fueled by hawkish Fed sentiment and forced selling pushed liquidations above $400 million – the cycle’s peak. Each wave amplified volatility. And yet, Aave processed flows without systemic disruption.
Liquidation activity on Aave concentrates first on Ethereum [ETH], where the largest collateral positions sit. Consider the attached image, for instance. It identified Ethereum processing about $3 billion in liquidations across 58,106 transactions, confirming its dominance. However, liquidation pressure did not remain confined to Ethereum alone.
Instead, it spread across Aave’s multi-chain markets as leverage unwound. However, activity then dispersed. Polygon emerged as the most active by count, recording 137,187 events tied to $623 million in volume. This shift underlined retail-scaled positions unwinding across cheaper networks.
Momentum extended further to Avalanche [AVAX] ($196 million), Arbitrum [ARB] ($175 million), and Base ($124 million), with Others at $41 million. Thus, while liquidation value concentrated on Ethereum, event frequency broadened cross-chain as DeFi participation deepened.
From forced liquidations to protocol yield
SVR monetization deepened as liquidation flows intensified, according to LlamaRisk data. Initially, about $559.8 million in SVR liquidations moved through the system. This activity resulted in the recapture of approximately $13.17 million in value.
Of this, Aave earned nearly $8.56 million, while Chainlink [LINK] received about $4.61 million. Recapture spikes coincided with forced unwinds as volatility increased, strengthening the previously added revenue layer. More importantly, Aave transformed liquidations into yield streams.
First, liquidation bonuses created a spread of income. Next, SVR captured the execution MEV that had previously leaked externally. Then, treasury reserves redeployed this value to lending and incentives.
Consequently, market stress no longer reflected pure loss but evolved into sustainable, protocol-level yield generation.
Final Thoughts
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Liquidation cascades peaked with BTC’s 33% drop and over $1 billion in forced unwinds, but muted flows signaled a leverage reset.
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Aave processed over $4.65 billion in liquidations, while SVR recaptured $13.17 million – Converting volatility into treasury-linked protocol yield.
