Institutional Borrowers Max Out Credit Pools, Spreading Liquidity Crunch to Cryptocurrency Lending

Several institutional crypto capital businesses have maxed out their credit pools on Clearpool, an uncollateralized lending protocol. As market anxiety grows, the liquidity issues of crypto trading firm Alameda Research may affect crypto lenders. Due to reaching 99% of the maximum credit allocable to Amber Group, Auros, and LedgerPrime under the protocol, their respective Polygon Permissionless Pools on Clearpool were given the “warning” label. Additionally, Folkvang and Nibbio’s Ethereum Permissionless Pools were given the “warning” status.

The loan dashboard for Clearpool shows that the total debt associated with these loans is $14.8 million. Requests for feedback from the five implicated cryptocurrency companies were not immediately fulfilled. There are growing concerns that Alameda Research’s worsening financial problems might lead to a liquidity crisis in the larger digital asset market, comparable to the collapse of the Terra blockchain or the downfall of the cryptocurrency hedge fund Three Arrows Capital earlier this year. Alameda is a subsidiary of the struggling cryptocurrency exchange FTX, which rival firm Binance earlier on Tuesday pledged to rescue. Its financial sheet is heavily burdened with FTT tokens, which fell by 80% in a single day.

Crypto trading companies frequently issue credit lines and take out loans for their trading activities using Clearpool, a well-known uncollateralized lending protocol. The loans are secured by the reputation and purported sound financial status of the borrowers, who are not required to commit any assets in exchange. Interest rates in these crypto lending pools are dynamically determined by how much money is withdrawn from the pool. The policy penalizes by raising the loan’s interest rate from the customary 8–10% to 20–25% annual percentage rate (APR) when a borrower approaches the credit line’s maximum.

The equivalent of maxing out a credit card in real life is using all of the available debt from these DeFi protocols, which might be a symptom of more widespread market financial trouble. Initiating hundreds of millions in uncollateralized loans so far, Alameda Research has been a diligent user of decentralized lending protocols. However, compared to early this year, its current outstanding debt on DeFi methods is very low, which means less investor money would be at risk if Alameda defaults on the loans.

The trading company used Clearpool’s Permissioned Pool to get two loans from Apollo Capital and Compound Capital Management, totaling $5.5 million, as shown by the data dashboard of Clearpool. According to TrueFi’s loan dashboard, it took out a $7.3 million loan from a TrueFi lending pool that would mature on December 20. On November 20, the following interest payment is due. Although Alameda had a lending pool that originated $288 million in loans up to the spring of 2022, lending pools on Maple Finance do not currently have any ongoing loans to Alameda.

Uncollateralized lending’s viability in the nascent, unstable digital asset market has been questioned in light of many crypto insolvencies this year. When an uncollateralized debt defaults, there are no assets that creditors may seize right away. The procedures only provide a partial payment to the creditors; as a result, they must use debt restructuring or go to court to get their money back.

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