Maple Finance's $54M Bad Debt Shows Unsecured Crypto Loan Risks (2023)

Blockchain-based lending protocolmaple leaf financeLaunched in May 2021, with a bold concept: building a decentralized credit marketplace for cryptocurrencies where creditors and debtors can come together.

with many othersdecentralized financeThe Maple model, a DeFi (decentralized finance) lending platform that has emerged in the emerging digital asset industry in recent years, does not require the deposit of additional cryptocurrency as collateral so that it can be quickly seized or liquidated in case of default. . Instead, underwriters of various loan “groups” will decide whether to make loans, essentially assessing borrowers' ability to repay based solely on their creditworthiness.

But the trauma of the cryptocurrency market this year created a brutal stress test, and now Maple is facing the biggest crisis in its 18-month history.

Now Maple analysts and project participants are scrambling to figure out what went wrong and how to tweak the rules and procedures to make the platform more sustainable. Because Maple is only the operator of the project and not a creditor to the individual groups, it is not facing a credit crisis of its own. But with depositors in Maple's loan group traumatized by recent losses, a key question is whether the participants will stick around.

The main focus of analysts' attention is the Achilles heel of the business modelUnsecured cryptocurrency loan. Inadequate protocol design choices combined with questionable human decisions have left depositors unprotected and exposed to losses of up to 80%.

“Unsecured lending in DeFi still relies on centralized institutions for underwriting, which goes against the spirit of transparency and decentralization,” said Walter Teng, vice president of digital assets at market research firm Fundstrat.

cryptographic credit crisis

Maple rides the wave of the cryptocurrency lending boomIncrease the size of the loan900 million dollars in a year. Initially, the protocol was popular with cryptocurrency trading firms and market makers keen to lend liquidity. Depositors include ordinary retail investors and income-seeking institutional investors. In Maple's decentralized model, depositors are effectively creditors.

Maple's lending process is governed by computer-encoded smart contracts. However, the protocol has a centralized element.

Each credit fund has a representative, a finance company, which guarantees the loan and guarantees that the funds from the fund are lent to entities that can repay the loan.

The role of the credit fund manager is essential for Maple and its competitors because the loans are not sufficiently collateralized. This means borrowers need to invest fewer assets to get a loan, and often nothing at all. So if the loan goes bad, there is nothing to fix it; it is like an unsecured mortgage on the house.

Deposits and loans at Maple declined rapidly earlier this year after the collapse of the Terra blockchain triggered a cascading wave of losses and a credit crunch for cryptocurrencies. FTX's rapid fall in November was another blow. Outstanding loans fall to $82 million, according to statisticsToken terminal data。

One of the two remaining loan portfolio managers, M11 Credit, a subsidiary of investment firm Maven 11, recently came under fire for allowing bad debts to accumulate on three of its loan portfolios.

orthogonal transactionHe is a major borrower in the M11-run Maple Credit Fund, and has defaulted on $36 million worth of loans.

Missing payment from Auros Global$3 million loan, but M11 opted not to default and undertake restructuring. Even before that, M11 Credit allowed distressed borrowers to extend the terms of loans totaling $10 million for two weeks on November 13 instead of paying them off. Then, on November 27, the debt was extended again.

"What's the point of using blockchain technology other than watching the goals move if there's an arbitrary delay?"A user complainedNo hay canal Discord do Maple.

"Far From Perfect"

When asked about the extension, M11 Credit told CoinDesk via email that it decided to refinance the loan "only after receiving very strong guarantees" and "after extensive dialogue with interested parties."

The email added that "terms are at the discretion of the M11 credit team" per Maple's design.

"Unfortunately, due to this dependency, it is impossible to discern whether Auros is capable of providing refinancing services or whether it is buying time for its inevitable demise," Fundstrat's Teng said.

Maple announced Thursday,I'll set it upA revision of the protocol called Maple v2 will be released next week.

Charlotte Dodds, Maple's director of marketing, said via email that the update will include an update to the withdrawal process, a review of the pool's override mechanism, and more data on the public pool dashboard.

"We're far from perfect," Maple co-founder Joe Flanagan said on Friday's community conference call. "We will continue to build for the future."

First-mover advantage for a quick exit

Fund managers should also look to diversify loan portfolios across multiple borrowers to avoid any systemic risk.

After the FTX crash in November, liquidity dwindled and loan interest rates plummeted, making it extremely difficult to maintain a balanced loan portfolio. Last month, Maple's total loan volume fell by two-thirds, from $260 million, according to the data.Token terminal data。

followingFTX files for bankruptcy protection, most borrowers includePipamiVolkwangThey prepaid the loan and the fund manager de-risked the loan portfolio, according to one person.renewBy Maple, November 17. At the same time, M11DecideNo new loans are made to keep cash deposits high.

Loans closed early freed up a lot of money to credit groups, allowing depositors nervous about the FTX event to withdraw their funds. (As per the Maple code, there is a 10-day waiting period from the start of the withdrawal until the user can withdraw the funds.)

Ultimately, this led to a high concentration of the mutual funds, bad debts for distressed borrowers, and depletion of cash deposits in the three troubled mutual funds.maple credits panel。

As of December 9, one of theM11 USDC Stablecoin Pool80% of the loans go to a single borrower: an orthogonal transaction. As of August 31, the figure was 14%, below the threshold, according to Sherlock's statement.

Pool-wrapped Ethereum (wETH), another popular cryptocurrency in DeFi, dominated by M11, accounted for 55% of all outstanding loans, going to troubled Auros and Orthogonal. Nearly half of the outstanding debt in the M11-licensed USDC pool is in auros.

like oneuser of twitterPoint out that allowing cash withdrawals and depleting the pool means those who are not fast enough will bear the brunt of the loss, rather than spread it out among many creditors.

faulty design

Seasoned bankers know that defaults are inevitable in the credit business. That's why there are built-in security checks when this finally happens. In the case of Maple, sufficient precautions may not have been taken.

Each credit pool on the platform has a separate fund called “pool collateral”, which acts as insurance to cover the first loss (or at least part of it) in case of default. To ensure that pool administrators act responsibly and do everything they can to prevent violations, they should lock down assets at pool boundaries.

Angry users are now wondering if subscribers are interested enough to participate.

M11 Credit's asset pool covers assets with a total value of less than $1.2 million and is responsible for three sets of loans totaling $74 million and charges management fees.

Any investor can grow this insurance pool by depositing USDC and Maple's own token, MPL, and is rewarded for taking the risk of their first loss.

Still, savvy investors who spot problems could quickly withdraw money from mutual funds before defaulting, leaving them cashless to repay creditors.

To date, pool coverage for the three pools managed by M11 is virtually exhausted, covering only a fraction of bad debts.

As Fundstrat's Walter Teng described it, “the design is flawed”.

Pooled investors mixing deposits in the USDC stablecoin and Maple's MPL are also a problem.

Kyle Doane, a digital asset trader at Arca, said that if the funds that were supposed to be used to cover bad debts go into the protocol's native token, then "when the protocol itself has problems, the value of that insurance will go down." ". ".

What is happening now with Maple Finance?

The full extent of the situation is unclear, but the potential losses run into the tens of millions of dollars.

Based on Sherlock's main creditorprophecy, the asset is lent toorthogonal transactionIt is likely that it will disappear forever or lead to a long legal process.

In shocking news for lenders, the three distressed credit groups have less than $2 million in total to compensate depositors. About $1.2 million came from M11 loans.

Maple is also considering seizing another $1.2 million from the insurance fund of an orthogonally managed credit fund that failed business ventures use to fuel the fund.

Something similar happened when Maple defaulted for the first time in its history. in July,Babel Finance defaults on a loan of 10 million dollarsLenders posted a $7.9 million loss on Orthogonal's credit pool. However, due to the larger group size, this is only a 3.8% reduction.

Due to its design, Maple does not suffer much with the default settings. However, a damaged reputation and loss of trust can hurt in the long run.

"The Maple deal will probably be good," said Dustin Teander, an analyst at Messari. "The key to preventing this from happening is to link credit decisions directly to disclosed cash flows and assets, rather than linking the Trust as a whole."

“The success of the Maple model is giving companies a real-time view of collateral and ledger, meaning underwriters can adjust accordingly,” said Timo Lehes, co-founder of regulated DeFi infrastructure provider Swarm Markets.

Arca's Doane said two key issues needing improvement are "the process by which losses are socialized" and the asset mix pooled to cover losses.

Teander said that the next Maple update could be an "opportunity to implement some features to better manage the risk of the protocol."

The rapid contraction of Maple's business may suggest that the turnaround hasn't happened fast enough.