Maple Finance accrued $54 million of bad debt
Coindesk • December 12, 2022
Maple Finance, a Canadian blockchain-based lending company, recently sold $54 million worth of bad debt. The sale illustrates the risks of lending without collateral, even if you log the transactions on a distributed ledger.
Maple Finance was founded in 2017 and offered loans without the need for collateral. Instead, it aimed for a "peer-to-peer" based lending system, where the community would support the loans. Unfortunately for Maple Finance and its investors, many of the loans were not repaid. This led to a scenario where the loans remained on the books as "bad debt," meaning they are likely never to be repaid. Maple Finance sold the bad debt to a group of investors for pennies on the dollar to limit its losses.
The events at Maple Finance demonstrate the risks of lending without collateral in the world of crypto. Similar to traditional loans, lending platforms without proper collateral do not offer guarantees of repayment. On-chain blockchain lending without collateral suffers from the same issues as off-chain lending without collateral because both types of lending lack a safeguard against default. In the case of a default, the lender has no means of recovering their funds, leading to a situation where the loan remains on the books as "bad debt," meaning it is unlikely to be repaid.
In addition, both on-chain and off-chain lending without collateral rely on the trust and creditworthiness of the borrower, which can be difficult to assess accurately in the absence of traditional credit scoring systems. This can make it difficult for lenders to properly evaluate the risk of a loan and can lead to a higher rate of default.
Two former credit pool managers, crypto lender Celsius Network and FTX sister trading firm Alameda Research, are now in bankruptcy and facing negative media attention over alleged unsavory business practices. A third credit pool manager, Orthogonal Trading, was accused of misrepresenting its financials to hide losses from FTX and was subsequently removed from Maple on December 5. One of Maple's remaining credit pool managers, M11 Credit, has recently faced criticism for allowing bad debt to accumulate in its three lending pools. Orthogonal Trading defaulted on $36 million in loans from Maple credit pools managed by M11.
Overall, the lack of collateral in on-chain and off-chain lending presents significant risks for both lenders and borrowers. While quick, and ‘capital efficient’, your capital is not deployed efficiently when you lose it. As such, Fourstack does not utilize or invest in undercollateralized borrow and lending protocols and prefers protocols with collateral baked in such as Aave.