The crypto auditing company is expecting a $4 million loss from its deposit made to a credit staking pool on DeFi lending platform Maple Finance. Funds invested in the pool were borrowed by Orthogonal Trading, who defaulted on $36 million worth of outstanding loans after exposure to bankrupt crypto exchange FTX.
Crypto audit firm Sherlock is expecting a loss of $4 million that it had deposited into a credit staking pool run by DeFi lending platform Maple Finance. The pool managed by institutional crypto lender M11 Credit (Maven 11) was being used by Orthogonal Trading to borrow funds.
However, Orthogonal Trading – the largest lender on Maple’s USDC staking pools, declared insolvency from its exposure to bankrupt cryptocurrency exchange FTX. The trading company defaulted on five different loans amounting to $31 million in USDC and $5 million in wETH (Wrapped ETH). Orthogonal was due to pay back a $10 million USDC on December 4th to M11 Credit when it announced bankruptcy. Maple Finance accused the trading platform of misrepresenting its financial position and operating while being effectively insolvent without notifying. Maple severed all ties with Orthogonal on December 5th.
On August 31st, Sherlock deposited $5 million USDC to Maple’s $38.5 million staking pool from which Orthogonal was borrowing funds. That month Orthogonal’s credit only accounted for 14% of the pool’s loans. Now the bad debt represents 80% of its outstanding loans, all taken out by the crypto trading platform. In a blog post, Sherlock told stakers that it is expected to recover 20%-25% of the funds but could lose up to $4 million. The company also stated that it is not in a financial situation to be able to compensate stakers if it needs to continue operations and is preparing to write off the funds as bad debt.
Sherlock wanted to withdraw all funds from the staking pool following FTX’s implosion but could not because Maple’s 90-day lockup period for new deposits had not ended. After the lockup period expired at the end of November, Sherlock initiated a withdrawal but had to wait another 10 days before reclaiming the assets. It was in the middle of this waiting period that Orthogonal Trading defaulted on its outstanding loans.
Since last year, Orthogonal Trading, who also managed a USDC pool on Maple Finance, has lent out $563 million in loans to various companies including to FTX’s sister company and trading firm Alameda Research. Orthogonal said that it had stopped lending to the market maker earlier this year after discovering “key weaknesses” during due diligence. But the company had a significant amount of assets stuck on Alameda which could not be retrieved in time. Apart from the $31 million loans in USDC, Orthogonal also has four active loans of 3,900 wETH worth $5 million from other M11 Credit managed pools on Maple Finance. While the USDC default represents 80% of active loans in the pool, wETH defaults account for 18% of the pool’s outstanding debt.
The situation with Orthogonal shows the risks and shortcomings of the unsecured loans business model on decentralized finance (DeFi) lending platforms like Maple Finance. These loans do not require the borrower to pledge any assets as collateral against the debt that could be used to liquidate in the event of a default. Instead the loans can be issued based solely on the borrower’s creditworthiness – a criteria of things like financial standing and due diligence that is performed by the loan’s underwriter or manager of the lending pool.
Maven 11 is now preparing to take legal action against Orthogonal Trading to recover all outstanding loans. Another day, another FTX victim is taken out.