The blockchain-based lending protocol Maple Finance started in May 2021 with a bold concept: Build a decentralized credit marketplace for cryptocurrencies, where lenders and borrowers could come together.
Unlike many other decentralized finance (DeFi) lending platforms that have cropped up in recent years in the nascent digital-asset industry, Maple’s model would not require extra cryptocurrencies to be deposited as collateral that could be seized or quickly liquidated in the event of a default. Instead, underwriters of various lending “pools” would make the decision on whether to grant loans – essentially evaluating the borrower’s ability to pay based on their creditworthiness alone.
But this year’s trauma in crypto markets has provided a brutal stress test that now has Maple facing the biggest crisis of its 18-month history.
In just the past two weeks, some $36 million of loans have defaulted with another $18 million distressed. The soured debt represents 66% of the total outstanding in Maple’s four active lending pools, with some of the biggest borrowers acknowledging they were devastated by the spectacular collapse of Sam Bankman-Fried’s FTX crypto exchange. Maple’s native token, MPL, has tumbled 50% over the period to an all-time low.
Now analysts and participants in the Maple project are grappling with what went wrong and how the rules and procedures might be tweaked to make the platform more sustainable. Since Maple merely serves as the operator of the project, and not as a lender to the various pools, it’s not facing its own credit crisis. But with depositors to Maple’s lending pools scarred by the recent losses, a key question is whether participants will stick around.
A major focus of analysts is on what appears to be the Achilles heel of the business model of uncollateralized crypto lending. Poor protocol design choices combined with dubious human-made decisions left depositors unprotected and facing up to 80% losses.
“Uncollateralized loans in DeFi are still reliant on centralized parties for underwriting, antithetical to the ethos of transparency and decentralization,'' said Walter Teng, vice president of digital assets at market research firm Fundstrat.