By Michael Scott
The largest platform for unsecured lending is confronting a debt default crisis set to plunge its depositors into huge losses. Maple Finance has acknowledged $54M bad debt in its protocol. The blockchain-based protocol offers a decentralized credit marketplace that congregates lenders and borrowers.
Maple’s Business Model Vulnerable to Default
Unlike the conventional decentralized finance (DeFi) platforms, Maple utilizes a unique model where borrowers are not compelled to deposit extra cryptocurrencies as collateral one can liquidate or seize during default. Conversely, the underwriters decide on granting loans by evaluating the applicant’s capability to pay solely by assessing their creditworthiness.
The lending protocol confessed the slowdown witnessed in the crypto markets caused brutal stress for the Maple model in its 18-month operating history. In particular, it has acknowledged $36M and another $18M locked in distressed status. The sour debt accounts for 66% of the outstanding borrowings across the four active pools. The defaulting borrowers attribute the calamitous FTX downfall. This revelation has plunged the protocol’s native token into a downtrend that has eroded 50% of its price.
Participants in Maple’s project are considering tweaking the procedures to make the decentralized platform sustainable. While Maple is just the project operator, the recent losses may scare depositors to exit their lending pools.
Poor Design and Human-Made Decisions
A major revelation from the analysis of the Maple Finance crisis indicates poor design and human-made decisions have exposed depositors to 80% unprotected losses. Fundstrat market research company executive, Walter Tend, acknowledged attributed the human input in the Maple crisis to the reliance on centralized parties to underwrite uncollateralized lending in DeFi.
Maple Finance acknowledged that declined lending on the protocol had eroded the loan book from $900M in last year’s boom to $82M. The decline is attributed to Terra blockchain’s downfall triggering a series of losses that culminated in the credit crunch. Consequently, deposits and borrowing declined sharply.
FTX collapse in early November dealt the DeFi protocol a major blow. Token Terminal data estimated the resulting market slowdown, eroding the outstanding loan book to $82M. Token Terminal attributed the decline to the bankruptcy of two credit pool managers, Alameda Research and Celsius Network, on Maple’s marketplace.
Misrepresentation of Financial Health
Weeks later, Maple booted Orthogonal Trading for allegedly misrepresenting its financial health. The December 5 decision was prompted by a $36M default. Auros Global failed to honor its $3M loan repayment.
The pool manager, M11 Credit, failed to declare the default and seek restructuring. Instead, the Maven 11 investment subsidiary firm piled up debt. Maple found M11 Credit culpable for allowing Auros to extend the maturity date of $10M for two weeks rather than demand repayment.
The pool manager would extend the payment date on November 27, raising concern about the need for blockchain tech when borrowers are getting arbitral extensions.
The FTX crash worsened Maple’s debt crisis as failure to issue another loan to Nibbio, and Folkvanh borrowers freed cash quickly depleted by depositors’ withdrawals. The decision to allow cash withdrawals is alleged to have drained the pools, leaving other depositors to bear the losses.
Seasoned bankers have questioned Maple’s precautions since defaults are inevitable when operating a lending business. The explanation indicates that Maple relies on a faulty design that will leave creditors plunged into huge losses.
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