Yesterday, $237 million in collateral was liquidated from 1,222 loans using Aave, the biggest money market in decentralized finance.

Why it matters: This was the system working as designed.

• Borrowing against digital assets is the oldest function enabled in decentralized finance. The way bad loans get closed, however, helps to illuminate how DeFi finance works differently than traditional finance.

Catch up fast: When people take out a loan in DeFi, they post collateral.

• They have a ratio to maintain between the value of that collateral and what they have borrowed. Smart participants borrow much less than they are allowed, to create room for volatility.
• Yes, but: Most people don't expect the market to move quite as fast as it did this week.

By the numbers: More than half of all the collateral liquidated over the last year was liquidated Sunday through yesterday morning.

• The second worst day of the last year was April 14, when $39.7 million was liquidated.
• On most days, liquidations are in the thousands.

How it works: The many blockchains on which Aave runs are composed of smart contracts, which are used to facilitate DeFi lending.

• These global computers only run calculations when people pay them to do so. Which is why there are people (or bots, with funds attached) that function as liquidators, which are crucial to this story.

Liquidators call a function on the smart contracts, which costs money to run, that checks that the loan (the details of which are all public) has gone bad.

• If the smart contract verifies it, then the liquidator can buy out the loan (or part of it), until its collateralization ratio is adequate again.
• Each of these loans has rules for these liquidations, but it basically always works out to a bit of the collateral going to the liquidator, say 5%.

Because of the free money on the table, enough people have set up bots to watch for these situations that loans get liquidated nearly instantly upon falling below collateral minimums.

• There was something like $60 million worth of liquidation bonuses yesterday, which earned $6 million for the Aave DAO Treasury, which gets a small cut.

State of play: Decentralized finance, or DeFi, has been fairly moribund since FTX's collapse, but Aave has been rising for the last year.

• It had just regained debt levels similar to May 2022 (the Terra disaster), before this week's panic.

The big picture: Liquidations are painful for borrowers because they lose some of their collateral.

• But it isn't the system breaking. This is the system working correctly.
• To break, a DeFi money market (like Aave) would need to become insolvent. That is, it would need to have less collateral on hand than what is lent.

The bottom line: The downside of an efficient system like this is when someone borrows against an asset that can lose 20% of its value in six hours, as ether (ETH) did as Sunday turned to Monday. That collateral is never really very safe.

News broke last week that Russia will likely begin allowing companies to use cryptocurrencies as a way of conducting international trade.

Why it matters: If a sovereign nation impacted by economic sanctions were to turn to cryptocurrency, that would be an indisputable real use case.

Background: Russia is under a heavy array of targeted sanctions by the West, in a coalition of dozens of countries, but it's not a wholesale blockade of the country.

• That said, Russia has pivoted to a full war economy, so sanctions targeted at such efforts reach almost everywhere now.
• The coalition has expressed a willingness to cut off companies that do business with Russia, even if they are not in a coalition nation.

Between the lines: Details for the legislation are still coming out.

• We spoke to Valerie Kennedy, from the investigations team at Chainalysis and a Russia expert, who said that her read of the legislation is that it will leave the details to the Russian central bank.
• It would also start on a limited level, as a test. That said, some level of crypto payments for international trade should happen this year, according to a speech quoted in the Russian press, by Elvira Nabiullina, of the Bank of Russia.

What they're saying: "This is a patriotic effort," Kennedy explained. "Whether or not this is going to be a large shift here remains to be seen."

• Looking at the conversations around the new legislation, she said a lot of the rhetoric speaks to this use of cryptocurrency being a way to support the strength of the Russian state.
• However, she expressed some doubt that there's enough money in the crypto system now to make a dent in trade at the scale of Russia's.

Yes, but: There could be a plan for that. Kennedy also pointed out that the founder of Garantex, a large Russian cryptocurrency exchange, launched Exved about a year ago, a company for moving funds between rubles, dollars and the stablecoin tether (USDT).

• Garantex has previously been specially sanctioned by the U.S. Treasury.

Meanwhile, there's still talk of a digital ruble, but that's a different topic. This legislation concerns permitting Russian businesses to use cryptocurrency to pay bills.

What we're watching: If there's a sharp increase in the supply of any particular stablecoin after the pilot of the trade program kicks in.

📧 In a court filing, the SEC accused Coinbase of overreaching in its request for the chairman's personal emails. (Decrypt)

🇮🇳 Tax authorities in India gave notice to Binance of suspected tax evasion on the platform. (CoinDesk)

👩‍🎨 Morpho, a lending application we described early on, raised $50M. (Blockworks)

🔮 Two indicators, long-term options and strong buying in the U.S. suggest market participants see strength ahead for BTC. (CoinDesk)