The mass liquidation in early 2026 showed that leverage in the crypto market had "reset itself," with Short liquidations increasing while Longing liquidations weakened even during sharp price swings.
Bitcoin's volatile price movements have triggered liquidation chain in Derivative and spilled over into DeFi. Cyclical liquidation data, across AAVE 's networks and SVR mechanism, demonstrates how the protocol can transform market stress into profit streams at the protocol level.
- BTC experienced a sharp drop in early 2026, leading to billions of dollars in liquidations, but the scale of the squeeze/ Longing liquidation was "lighter" than in previous cycles, suggesting that leverage had been reset.
- AAVE noted value-driven liquidations on Ethereum, but the number of events spread to low-fee networks like Polygon, Avalanche, Arbitrum, and Base.
- The liquidation stream is used by SVR to “recover value,” generating revenue for AAVE and Chainlink, transforming volatility into yields tied to the protocol treasury.
The 33% drop in Bitcoin triggered a liquidation chain but indicated that leverage had reset.
BTC saw significant Longing/ Short liquidations in early 2026, but the liquidation map shows weakening Longing liquidations and less explosive Short squeezes compared to 2021–2024, implying that overall leverage has been significantly "Dump".
The crypto market began the year under increasing leverage pressure as risk levels in Derivative accumulated. By mid-January, approximately $550 million in liquidated Longing positions had pushed Bitcoin (BTC) down to around $86,000, revealing structural fragility as leverage was forced to contract.
Pressure escalated on January 29, 2026, when BTC dropped to $84,000, along with approximately $1 billion in mandatory liquidations. Worse conditions occurred in early February: BTC plummeted 33% from $90,000 to $60,000 in just 72 hours, triggering widespread margin calls.
However, the liquidation map revealed a structural shift. As BTC approached $64,000, accumulated Short liquidation increased while Longing liquidation thinned. Notably, the break below $58,000 triggered only about $670 million in Longing liquidation, significantly lower than in previous cycles.
Even the breakout above $70,000 only generated about $2.6 billion in squeeze Short positions, a milder move than the chain reactions of 2021–2024. This signal aligns with a scenario where leverage has been rebalanced, selling pressure has decreased, but demand continues to increase slowly, suggesting a period of sideways consolidation before a clear recovery.
Market shocks have spilled over into multi- chain liquidations on AAVE.
Liquidation on AAVE surged as crypto prices were impacted by macroeconomic shocks and market events, with major waves recorded in 2021, 2022, and 2025–2026, but the protocol still handled the flow without experiencing systemic disruption.
Liquidations on AAVE (AAVE) increased when external shocks impacted crypto prices. In May 2021, China's crypto ban and environmental concerns related to Tesla triggered a crash, resulting in approximately $362 million in liquidations across 5,500 positions.
Selling pressure returned in June 2022 when the LUNA crash forced the liquidation of over 32,000 positions, although the total volume was lower, at nearly $200 million. Tensions resurfaced on October 10, 2025, when a sudden drop wiped out over $250 million in a single day.
More recently, during the period from January 31st to February 5th, capitulation driven by expectations of a hawkish Fed and forced selling pushed liquidations past $400 million, described as the peak of the cycle. Each wave amplified volatility, but AAVE still managed the liquidation flows without showing systemic breakdown.
Ethereum leads in liquidation value, while Polygon leads in the number of events.
On AAVE, liquidation value is concentrated primarily in Ethereum due to the large collateral size, but in terms of event frequency, it spreads across low-fee networks, reflecting the delevering process of many small retail positions across multiple chain.
Liquidation activity on AAVE is primarily concentrated on Ethereum (ETH), where the largest collateral positions are held. The data presented in the article shows that Ethereum processed approximately $3 billion in liquidations across 58,106 transactions, confirming its dominant Vai by value.
However, the pressure wasn't confined to Ethereum. Activity spread across AAVE 's multi- chain marketplaces as leverage was loosened, then dispersed across networks. Polygon emerged as the leader in terms of volume, recording 137,187 events associated with $623 million in volume, indicating a retreat of many "retail-scale" positions on low-cost networks.
The momentum also extended to Avalanche (AVAX) with $196 million, Arbitrum (ARB) with $175 million, and Base with $124 million, while the “other” group accounted for $41 million. The result is: value is concentrated on Ethereum, but event frequency is spread across chains as DeFi participation deepens.
SVR transforms liquidation flows into yields at the protocol level.
According to LlamaRisk data, SVR recorded a large volume of liquidations and "recovered" a portion of the value to allocate revenue to AAVE and Chainlink, helping to turn volatility and forced liquidations into a more sustainable revenue stream for the protocol.
According to data from LlamaRisk, the level of SVR monetization increased as the liquidation flow thickened. Initially, approximately $559.8 million worth of SVR liquidation passed through the system, generating a recovery of approximately $13.17 million in value.
In this recovery portion, AAVE received nearly $8.56 million, while Chainlink (LINK) received approximately $4.61 million. The surges in recovery coincided with periods of forced liquidation during increased volatility, reinforcing the previously added revenue stream. The key is that AAVE has transformed liquidation into a yield stream.
The mechanism is described in three layers: (1) liquidation bonuses create income differentials, (2) SVR seizes execution MEV that could “leak” out, (3) treasury reserves redeploy this value to lending and incentive programs. Thus, market stress is no longer just a loss, but evolves into a yield-generating mechanism at the protocol level.
Conclude
The liquidation chain peaked when BTC dropped 33% with over $1 billion forcibly closed, but the intensity of the liquidation flow has eased, suggesting leverage has been reset. In DeFi, AAVE recorded total liquidations of over $4.65 billion, while SVR recovered $13.17 million, converting volatility into yields tied to the protocol treasury.
Frequently Asked Questions
Why is it said that leverage in the crypto market is showing signs of a "reset" at the beginning of 2026?
Because when BTC neared $64,000, accumulated Short liquidation increased while Longing liquidation thinned; the drop below $58,000 only triggered about $670 million in Longing liquidation. Additionally, the breakout above $70,000 generated approximately $2.6 billion in squeeze Short, lower than the 2021–2024 cycles.
Where does the liquidation on AAVE take place, and which networks does it spread to?
According to the data presented, Ethereum leads in value with approximately $3 billion liquidated across 58,106 transactions. However, the number of events spread to lower-fee networks: Polygon leads with 137,187 events and $623 million, followed by Avalanche with $196 million, Arbitrum with $175 million, and Base with $124 million.
How does SVR generate revenue for AAVE and Chainlink through liquidation?
According to LlamaRisk data, the liquidation of approximately $559.8 million worth of SVRs generated a recovery of around $13.17 million, with AAVE contributing nearly $8.56 million and Chainlink around $4.61 million. The mechanism involved liquidation bonuses, SVR seizing execution MEVs, and redeploying value through lending treasuries, providing incentives.
