Several cryptocurrency investment firms were flagged as “warning” on the lending platform Clearpool for almost completely depleting their credit pools.

Market Trepidation

Many institutional crypto capital businesses maxed out their credit pools on Clearpool, an uncollateralized lending protocol, on Tuesday as market trepidation grew that the liquidity issues facing crypto trading firm Alameda Research might 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 a “caution” designation. Folkvang and Nibbio’s Ethereum Permissionless Pools also received the “warning” status.

According to the loan dashboard at Clearpool, these loans total $14.8 million in debt. By Wednesday, all five businesses had paid off all or a portion of their outstanding debt and returned their credit utilization to normal levels. Investors’ withdrawals from the credit pools, which reduced the total amount of credit available, were the cause of the abrupt increase in utilization. According to Elaine Wang, the PR manager for Amber Group, “We have already paid off our outstanding debts on Clearpool due to the significant volume of withdrawals. Our loan size outstanding on Clearpool has been quite stable and modest, and when utilization jumps due to greater withdrawals, we will often pay down a component of the loan to bring it back in line,” the company said.

Liquidity Crunch

There are growing concerns that Alameda Research’s mounting financial problems could lead to a liquidity crunch on the more significant digital asset market, similar to how Terra’s blockchain collapsed or how earlier this year’s collapse of the crypto hedge fund Three Arrows Capital. The struggling cryptocurrency exchange FTX, which rival exchange behemoth Binance pledged to rescue earlier on Tuesday, has a sibling firm named Alameda. FTT tokens that fell 80% in one day are abundant on its balance sheet. Crypto trading companies frequently issue credit lines and take out loans for their trading activities through Clearpool, a well-known uncollateralized lending protocol. The loans are secured by the reputation and purported sound financial standing of the borrowers, who are not required to commit any assets in exchange.

Impact of Liquidity Crunch on the Crypto Market

Interest rates are dynamically determined in these crypto-lending pools depending on how much capital is withdrawn from the collection. The policy penalizes by raising the interest rate on a loan from the usual 8–10% to 20–25% annual percentage rate (APR) when a borrower approaches the credit line’s maximum. The number of credit businesses that can access is reduced on Clearpool because capital providers can withdraw their funds at any time from the lending pools. Credit pools’ utilization rates may rise when withdrawals are at an all-time high.

The equivalent of maxing out a credit card in real life is taking out the maximum debt from these DeFi methods, which may indicate more widespread financial trouble on the market. Creditors took evasive action and withdrew money that was available for borrowing out of fear that Alameda and FTX would create a more significant market crash, which resulted in a liquidity shortage. According to Walter Teng, deputy president of digital assets at research firm Fundstrat, “Crypto lenders feel the credit squeeze from the Alameda insolvency.”

Alameda’s DeFi debt

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 decentralized financing (DeFi) protocols is low, meaning less investor money would be at risk if Alameda defaults on the loans.

The trading company used Clearpool’s Permissioned Pool to obtain two loans from Apollo Capital and Compound Capital Management, totaling $5.5 million, as shown by the data dashboard of Clearpool. Additionally, it took out a $7.3 million loan from a TrueFi lending pool that would mature on December 20. The lending pools on Maple Finance currently have no active loans to Alameda, even though Alameda had a lending pool that originated $288 million in loans up until the spring of 2022.

Conclusion

The unstable digital asset market has been questioned, considering many crypto insolvencies this year. There are no assets that creditors can seize immediately when an uncollateralized debt defaults. The protocols 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. Ironically, the second incidence of widespread deleveraging in the cryptocurrency industry illustrates the demand for transparency that DeFi fills.