Unsecured DeFi Lenders Look Shaky in the Face of FTX Contagion

The fallout from FTX’s collapse is just starting and within decentralized finance, platforms enabling unsecured loans are the most exposed.

The fallout from FTX’s collapse is just starting and within decentralized finance, platforms enabling unsecured loans are the most exposed relative to collateralized counterparts with millions in loans on the line, while total value locked slides.

Alameda Research owes various unsecured DeFi lenders at least $12.8M. While a relatively small figure, it accounts for about 7% of $176.8M in total value locked for those protocols. Major players in the space like TrueFi, dAMM Finance and Clearpool have all seen their TVL drop by over 40% in the last week — TrueFi led the way down, with its TVL dropping 71% to $12.4M.

Alameda Research, which is one of the 130-plus entities under the FTX group that filed for chapter 11 bankruptcy Friday, owes Apollo Capital, an investment firm, $3M. It also owes Compound Capital Markets, another investment fund, $2.5M. Clearpool, a platform which enables loans to institutions, facilitated both loans. 

Alameda also owes $7.3M on two loans via TrueFi. The loans’ maturity date is Dec. 20.

Maple Escapes Disaster

Maple Finance, a platform similar to Clearpool, appears to have escaped disaster, with its delegates, who manage the lending pools, closing all loans to Alameda in September, according to a post from the company. 

At one point, Alameda borrowed a total of $288M through Maple, Charlotte Dodds, marketing lead at the company, told The Defiant.

Maple is by far the largest project in the unsecured lending category with $135.7M in TVL.

Orthogonal Capital, which used Maple to lend to Alameda, said it terminated its relationship with the firm, citing declining asset quality, and unclear capital policy, among other concerns.

Alameda owes $10B to FTX, according to The Wall Street Journal. So the known $12.8M is a relatively small amount.

DeFi Llama founder, 0xngmi, cited a lack of confidence in lending to market makers as the reason for the drop in TVL.

More Bad Debt

Adam Cochran, well-known contributor to Yearn Finance and Synthetix, thinks there may be as yet undiscovered bad debt in the unsecured lending space. 

“I’ve got to imagine undercollateralized lending took a big hit here,” he tweeted in response to 0xngmi. “So many pool owners came out and touted no FTX exposure, but had large TVL  drops.”

Still, based on the current information available, Blake West, co-founder of the credit protocol Goldfinch, which like Maple, Clearpool, and others, make off-chain loans using users’ deposits, was encouraged by the status of the unsecured lending space in the wake of the FTX fallout. 

Could Have Been Worse

“When this news broke, I was concerned that perhaps there would be major issues surfacing some of those other protocols,” he told The Defiant. “I thought it could have been a lot worse, but it seems like it’s been relatively light.”

Of course, as Cochran alluded to, it’s not yet clear who exactly FTX and Alameda owe money to. Some is owed to users of the FTX platform and some is owed to Alameda’s counterparties. 

Unlike collateralized and on-chain lending platforms like Aave and Compound where users have to back assets they borrow, unsecured lenders rely on borrowers’ credit rating and reputation. Lenders are willing to take on that risk because they know who they’re lending funds to, unlike in collateralized lending platforms where they would deposit funds into a liquidity pool.  

On-Chain Safety

West thinks the on-chain aspect of unsecured lending protocols may have been responsible for shielding the subsector so far. 

“You gotta say that more than like a Galaxy or a BlockFi or anything like that, who [are[ also lending to market makers, traders, the DeFi protocols, their loans are there,” West told The Defiant. “You can see who’s borrowing and what the terms are, and when the payments are supposed to come back and whether they are coming back.”

West added that he thinks more of borrowers’ actions will happen on-chain in the future as more parties accept stablecoins.

“If anything, this makes me more bullish that we need more DeFi, not less and we need to get more of the flows on-chain,” West said, echoing a sentiment voiced by many in the open finance community.