The crypto derivatives market experienced severe leverage unwinding in early 2026, with over $1 billion in forced liquidations as Bitcoin fell 33% in 72 hours. Aave processed multi-billion dollar liquidations across chains, while sophisticated vault recapture mechanisms turned market stress into protocol yield.
Extreme leverage stress gripped cryptocurrency derivatives as the new year began, with $550 million in long liquidations initially pressuring Bitcoin towards $86,000. The situation intensified on January 29 when BTC fell to $84,000 amid another $1 billion in forced liquidations, triggering broad margin calls. A precipitous 33% drop from $90,000 to $60,000 followed within just 72 hours in early February, marking the cycle’s peak deleveraging event.
However, data from CoinGlass revealed a structural shift as cumulative short liquidations expanded while long liquidations thinned significantly. A break above $70,000 later produced $2.6 billion in short squeezes, a muted reaction compared to previous cycles which suggested leverage had largely reset. This indicated that while selling pressure eased, demand remained gradual, pointing to sideways accumulation before recovery.
Liquidation activity on the Aave protocol historically intensified during external market shocks. In May 2021, China’s crypto bans and environmental concerns from Tesla triggered about $362 million in liquidations across 5,500 positions. The June 2022 LUNA collapse forced over 32,000 positions to liquidate, with volumes near $200 million, while a sudden crash on October 10, 2025 cleared over $250 million in a single day.
The most recent capitulation, fueled by hawkish Federal Reserve sentiment from January 31 to February 5, pushed liquidations above $400 million. Ethereum processed the bulk of this value, with about $3 billion in liquidations across 58,106 transactions confirming its dominance as the largest collateral market. Activity quickly dispersed across Aave‘s multi-chain ecosystem as leverage unwound.
Polygon emerged as the most active network by count, recording 137,187 liquidation events tied to $623 million in volume, highlighting retail-scaled positions unwinding on cheaper chains. Momentum extended to Avalanche with $196 million, Arbitrum with $175 million, and Base with $124 million. This dispersion showed how DeFi participation and liquidation risk had deepened across the broader blockchain landscape.
According to LlamaRisk data, sophisticated vault recapture mechanisms monetized these liquidation flows, turning volatility into protocol yield. Approximately $559.8 million in SVR liquidations moved through the system, resulting in the recapture of about $13.17 million in value. Of this, Aave earned nearly $8.56 million while Chainlink received about $4.61 million, demonstrating how market stress evolved into a sustainable treasury-linked revenue stream.
