The FTX contagion continues, with DeFi’s uncollateralized lending platform Maple Finance the latest to run into issues.
Let’s break down what’s going on.
What is Maple?
As quickly mentioned in the intro, Maple is an uncollateralized lending platform. This means that institutional borrowers can borrow money on Maple without posting collateral, instead relying on what essentially amounts to an honor system to ensure the loans are repaid.
As some of you may be aware, this is normal for traditional finance but rare for DeFi. In traditional finance, an intricate system of creditworthiness and legal repercussions enable uncollateralized lending. In DeFi, there is none of that, so most lending platforms are overcollateralized, meaning that the borrower has to post more collateral than the value of the loan, ensuring that the lender stays solvent in the case of a default.
Maple is learning why most other platforms do it this way… the hard way.
One of Maple’s largest borrowers is the trading firm Orthogonal Trading, with $36 million of outstanding loans between USDC and ETH pools. Considering that this accounts for 80% of the USDC pool and 18% of the wETH pool, these are no small figures.
Following the FTX implosion, Orthogonal pledged that everything was ok on their end.
As we have seen time and time again, this was a lie.
In reality, Orthogonal’s funds have been stuck on FTX since the exchange collapsed. Those in the pool have now lost millions.
An Uncertain Future
This is the latest in a string of disasters for uncollateralized lending platforms.
- Babel Finance defaulted on a $10 million Maple loan in June
- FTX exposure caused Auros Global to miss a payment on a $3 million Maple loan last week
- Competitor uncollateralized lending platform TrueFi got hit with $4 million in bad debt in October when Blackwater and Invictus defaulted on loans.
It’s unfortunate that uncollateralized lending platforms have been so far unable to avoid bad debt. Overcollateralized lending is capital inefficient, and uncollateralized lending could be a DeFi gateway drug for institutions.
However, it will never reach its full potential unless they figure out a way to ensure the safety of lenders’ funds.