Liquidity crisis spreads to crypto lending as institutional borrowers max out credit pools
Several institutional crypto capital firms maxed out their credit pools on Clearpool, an unsecured lending protocol, as market fears grow that crypto trading firm Alameda Research’s liquidity problems could spread to crypto borrowers.
Amber Group, Auros and LedgerPrime received a “warning” label on their respective Polygon Permissionless Pools on Clearpool because they reached 99% of the maximum credit amount available to them in the protocol. Folkvang and Nibbio also received “warning” status on their Ethereum Permissionless Pools.
Those loans represent a total of $14.8 million in debt, according to Clearpool’s loan dashboard.
The five crypto firms involved did not immediately return Coindesk’s request for comment.
Fears have grown that Alameda Research’s deepening financial problems could potentially lead to a liquidity crisis in the broader digital asset market similar to Terra blockchain’s fall or crypto hedge fund Three Arrows Capital’s explosion earlier this year. Alameda is the sister company of ailing crypto exchange FTX, which rival exchange giant Binance agreed to bail out earlier Tuesday. The balance is loaded with FTT tokens which crashed 80% in one day.
Clearpool is a prominent collateral lending protocol, where crypto trading firms often open lines of credit and take out loans for their trading operations. Borrowers are not required to pledge assets in exchange, and the loans are secured by their reputation and alleged good financial standing.
In these types of crypto lending pools, interest rates are set dynamically depending on how much capital is taken out of the pool. When a borrower gets closer to the maximum limit of the credit limit, the protocol penalizes by increasing the loan interest rate from the usual 8-10% to 20-25% annual percentage rate (APR).
Taking out the maximum amount of debt from these DeFi protocols is the real-world equivalent of maxing out a credit card, and could be a sign of greater financial distress in the market.
“Crypto borrowers are feeling the credit squeeze from the Alameda bankruptcy,” Walter Teng, vice president of digital assets at research firm Fundstrat, told CoinDesk.
Alameda’s DeFi debt
Alameda Research has been a heavy user of decentralized lending protocols, originating hundreds of millions in unsecured loans so far. However, the current outstanding debt on DeFi protocols is quite small compared to earlier this year, meaning fewer investor funds are at risk if Alameda defaults on its loans.
The trading firm raised two loans, totaling $5.5 million, from Apollo Capital and Compound Capital Management using Clearpool’s Permitted Pool, according to Clearpool’s data dashboard.
It also borrowed $7.3 million from a TrueFi lending pool, due Dec. 20, per TrueFi’s loan statement. The next interest payment is due on 20 November.
Lending pools at Maple Finance currently do not have active loans to Alameda, although Alameda had a lending pool that made $288 million in loans through spring 2022.
This year, a series of crypto insolvencies has raised questions about whether unsecured lending is viable in the young, volatile digital asset market. When an unsecured loan defaults, there are no assets that creditors can reclaim immediately. Creditors receive only partial compensation from the protocols, so they must resort to debt restructuring or go to court to get their money back.
“Ironically, the second instance of mass decommissioning across crypto highlights the need for transparency that DeFi offers,” Teng said.
Read more: TrueFi’s $4M bad debt in limbo shows risk of unsecured crypto lending
