On December 5th, Maple Finance, currently the largest unsecured loan agreement on the chain, issued an announcement saying that because the partner Orthogonal Trading has made a major misrepresentation of its financial situation, the agreement faces a huge risk of default, and will cut off all cooperation with the company (including the disqualification of Orthogonal Credit, an affiliate of Orthogonal Trading), and pursue all appropriate legal avenues to recover funds.

According to the announcement and the follow-up disclosure of The Block,Orthogonal Trading concealed the fact that the company was already insolvent, borrowed a total of about 36 million US dollars from the USDC pool and WETH pool as the agent of M11 Credit, and continued to delay the arrearssecondary title

How Maple Finance works

Before explaining the specific impact of Orthogonal Trading’s default, let’s briefly explain the operating mechanism of Maple Finance.The system loop of Maple Finance relies on four roles - depositor, insurer, borrower, agent.

Depositors and insurers understand very well that users who provide borrowable funds to the pool, and insurers who are responsible for responding to emergencies in the pool and paying losses in advance, both can obtain loan interest income and release from Maple Finance through their respective actions. token incentives. Here we need to focus on explaining the latter two roles.

Borrowers are users with loan needs. In Maple Finance, they are generally institutional customers. Before submitting a loan application, the borrower needs to fill in information such as company information, loan purpose, repayment plan, etc., and the application will be submitted to the agent for review.

The agent is responsible for approving the loan. In Maple Finance, they are generally professional credit institutions. The agent will review the borrower’s financial status, credit quality, and rationality of the plan to decide whether to grant the loan, and through effective operation to earn some income.

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Default details

It can be seen from the Maple Finance agreement that the agreement currently has three qualified agents on the Ethereum chain: M11 Credit, Orthogonal Trading (acting as the agent is actually a subsidiary of Orthogonal Credit), Icebreaker Finance, of which Icebreaker Finance, as the agent who has recently reached a cooperation, has not issued any loans to the pool it is in charge of. in other words,The only brokers currently active on Maple Finance are M11 Credit and Orthogonal Trading.

At this time, it is very interesting to look back at the default... Orthogonal Trading, as an agent, is also applying for a loan from Maple Finance as a borrower, so it can only choose the only remaining active agent, M11 Credit, which is equivalent to an agreement Both of the above two agents had problems, one had falsified financial information, and one so-called professional credit institution didn't realize it...

Afterwards, the parties involved have given different perspectives through official channels.

M11 Credit claims that the main reason for this to happen is that Orthogonal Trading has been deliberately misreporting financial information. Specifically,Although Orthogonal Trading sent to the M11Credit says that there are indeed funds trapped on FTX, but the actual losses are much greater than the figures they give. After the incident, Orthogonal Trading did not disclose the risk to M11 Credit. Instead, it tried to make up for the loss through further transactions, and eventually lost a large amount of money.

Orthogonal Credit also issued a response saying that the parent company Orthogonal Trading did distort risk exposure,secondary title

Loss scale and recovery plan

As mentioned earlier, Orthogonal Trading’s default caused a total loss of approximately $36 million, affecting the USDC pool and WETH pool for which M11Credit was acting as an agent. in,The USDC default of about US$31 million accounted for 80% of the total size of the relevant pool, and the total insurance size of the pool was only about US$1.85 million, which is expected to have a serious impact on depositors; the WETH default of about US$5 million accounted for the relevant pool. About 17% of the total size, although the total insurance size of the pool is only about 200,000 US dollars, but the impact is relatively small.

However, since there are still small-scale borrowers who also have the risk of default, for example, M11 Credit mentioned a few days ago that the encryption trading company Auros Global may be unable to repay 2400 WETH due to the FTX incident, so there are still some potential losses in different pools. variable.

As of the publication, many companies in the industry have disclosed potential losses to users and the community.

The DeFi insurance platform Nexus Mutual disclosed that it has funds deposited in the WETH pool of M11 Credit as an agent, and has now initiated the withdrawal process. However, due to the mandatory waiting period of 10 days, it is hoped that most of the funds will be recovered smoothly by then.But still expect to lose 2461 ETH。

The smart contract audit platform Sherlock also disclosed that it has USD 5 million in the USDC pool in which M11 Credit acts as an agent.or about $4 million in losses due to borrower default。

at the same time,

at the same time,secondary title

Is unsecured lending a false proposition?

Credit loans and even unsecured loans have always been regarded as a potential path to solve the problem of inefficient use of DeFi funds.

but,Limited by the lack of a relatively mature credit system and supporting settlement system in the encrypted world, innovation in this direction has not been able to achieve scale. Among the many projects exploring the direction of credit loans, Maple Finance is already a rare representative of "top students" in terms of scale.

However, this Orthogonal Trading still exposed the design flaws of Maple Finance. When all borrowers and agents can effectively perform their duties, the agreement can indeed meet the needs of users for higher capital utilization efficiency, but once one or both parties Even dereliction of duty or even deliberate evil (in extreme cases, it is possible to jointly play games), the protocol still failed to show sufficient robustness.

Looking back at this breach of contract, although you can also say that if Orthogonal Trading hadn’t come to an end, if M11 Credit’s review was stricter, perhaps this man-made disaster could have been avoided.But this kind of human dependence is inherently contradictory to the code is law advocated by DeFi. The reason is that the reputation scheme adopted by Maple Finance is still the credit investigation model in the traditional financial field, but this model is moved to the chain, and it is not possible to achieve any breakthrough in the paradigm.

As believers in DeFi, we still look forward to a truly decentralized and trustless credit loan solution in the future crypto world, but for now, it may be too early.

As Sid Powell, founder of Maple Finance, said afterwards: “I am shocked and disappointed by this incident, we will take stricter due diligence and consider introducing a partial collateralization mechanism.”