Maple Finance Grapples With Heavy Losses as Bear Market Exposes Its Faulty Business Model

Maple Finance, the largest provider of unsecured loans in the crypto market, is dealing with a debt crisis. The company’s debacle shows that offering uncollateralized loans might be a challenge.

Another Victim of the Bear Market 

Maple Finance was launched in May 2021 with a vision of transforming the crypto and decentralized finance (DeFi) markets via a seamless and quick lending protocol. 

The difference for Maple, however, was that the platform allowed users to access funds without putting up their crypto as collateral. While other centralized and decentralized lending platforms required collateral for loan approvals, underwriters of various lending pools in Maple finance would decide whether to grant loans based on the borrower’s ability to pay and creditworthiness.

 Maple’s operation went smoothly for the most part. However, as the market continues to experience an unprecedented bear market, the company’s finances have continued to struggle. 

Maple has seen loan defaults worth about $36 million in the past two weeks alone, while a further $18 million has been distressed. With some of its biggest borrowers claiming to have been affected by the FTX insolvency, Maple now has about 66% of the total outstanding in its active lending pools in soured debt. 

Maple’s native MPL token has seen its value plunge by over 50% in the same period. While this is normal, considering that coin prices are generally down, MPL’s struggles show that the entire Maple Finance ecosystem is in grave danger. 

What Exactly Went Wrong?

Amid the entire debacle, it is worth noting Maple itself isn’t a lender. The platform merely serves as a conduit for funds, connecting lenders and borrowers and allowing them to do business. So, it isn’t exactly facing this debt crisis. 

Nevertheless, because depositors in the platform’s lending pools are now grappling with such heavy losses, the chances of these people sticking around are slim. 

As expected, the major issue with Maple is the platform’s business model itself. The platform had enjoyed the massive boom from the crypto bull run, increasing its loan book to $900 million in a year. With lenders and borrowers loving its quick transactions and high liquidity, Maple’s business surged significantly. 

While Maple’s operation is decentralized, it also incoporates centralization. Smart contracts govern the loan process, but every pool has a delegate, a financial services firm that underwrites loans and ensures the creditworthiness of borrowers. 

Since loans are undercollateralized, these delegates are crucial to Maple and its business. Borrowers can post fewer assets in value; depositors are essentially left holding the bag if a loan goes bad. 

Several of Maple’s major delegates have folded up or seen their relationships with the platform sour entirely this year. Celsius Network, the popular crypto lender, has filed for bankruptcy following its exposure to the collapsed Terra stablecoin ecosystem and the now-defunct hedge fund Three Arrows Capital. 

Alameda Research, the quant trading firm that also acted as a delegate collapsed last month as details surrounding it and sister company FTX came to light. The company, as well as FTX, are now in bankruptcy proceedings. 

Maple has also severed ties with a third delegate, Orthogonal Trading after the latter was accused of misrepresenting its finances over the past month and not admitting that it could not meet loan repayments. Orthogonal had been the company to default on the $36 million loans. 

The remaining two delegates have issues of their own as well. Auros Global, the final delegate, already missed a $3 million loan payment. M11 Credit, a subsidiary of investment firm Maven 11, reportedly allowed bad debt to grow in three of the lending pools it managed.

As for what happens next, it’s anyone’s guess. Maple is in the process of recovering some of its funds, but the picture is unclear. The assets lost to Orthogonal would most certainly be gone forever, although a portion of them could be restored through a lengthy litigation process. 

M11 has struck a hopeful tone about loan restructuring to Auros and recovering some of the lender’s capital, but even that seems like a tall order. Maple has also considered seizing a further $1.2 million from Orthogonal’s insurance fund, which the latter set up to boost its pools. Still, this would leave a lot of creditors with massive losses.