Unsecured lending DeFi primitive undergoes its first major stress test.
On June 17, Babel Finance, a bitcoin financial services company offering lending and asset management services, suspended redemptions and withdrawals citing “unusual liquidity pressures” amid recent market volatility.
Babel, which closed an $80 million funding round in June, has a $2 billion valuation and has raised $120 million in equity funding since 2018 from Circle and other backers.
Its problems come at a time of acute tension in the crypto markets, as the failure of the Terra ecosystem in May, followed by the struggles of Three Arrows Capital and Celsius, a crypto bank, raised concerns that other disasters are looming.
On June 20, the Babel team declared that it had eased its liquidity situation after reaching preliminary agreements with important counterparties and customers regarding the repayment of debts. Babel also noted that he had “conducted an emergency assessment of the company’s business operations to understand the liquidity status of the company.”
“Babel Finance will actively fulfill its legal responsibilities to its clients and strive to avoid further transmission and diffusion of liquidity risk,” he added.
Launched in May 2021, Maple was one of the first crypto-native unsecured lending platforms. The protocol reached the milestone of more than $1 billion in loans issued just 10 months after it went live. On June 21, Maple Finance confirmed that one of its loan pools had previously provided a $10 million loan to Babel.
Face to face with Sam Kazemian of Frax Finance￼
The pool is managed by digital asset trading company Orthogonal Trading. Maple added that Orthogonal has been in daily contact with Babel since the company suspended withdrawals, stressing Orthogonal’s focus on “protecting the interests of lenders” and pledged to share updates as they go along. and as the situation evolves.
Twitter User 0xGeeGee replied to the situation. “The first stress test for collateral-free on-chain loans, I wish you good luck. I will follow closely,” they said.
Babel isn’t the first Maple counterparty to struggle amid recent market turmoil.
June 13, Maple tweeted this embattled centralized crypto lender Celsius had not borrowed any funds from its pools despite operating as a lender on the platform. Maple said Celsius is the sole lender for the $20 million pool it operates, stressing that the pool has no interdependencies with other pools.
Two days later, Maple followed up with a statement saying many of its borrowers have minimal or no exposure to Celsius, concluding that any counterparty risk is effectively mitigated.
Maple also said its pool delegates have communicated with borrowers about their exposure to Three Arrows Capital (3AC), a multibillion-dollar Web3 hedge fund that is believed to be overdrawn and undercollateralized on loans borrowed from lenders. important in the sector.
Maple said most of its borrowers are unlikely to have direct exposure to 3AC, adding that borrowers it has spoken to have so far confirmed they have “minimal exposure” to Three. Arrows. “As a next step, we will be compiling updated month-end financial statements from borrowers in accordance with our usual practice,” Maple said.
Excessive risk taking
Babel has come under fire for allegedly engaging in risky business practices.
On June 18, reporter Wu Blockchain job an article noting that the company nearly wiped out in the March 2020 “Black Thursday” crash, in which the price of Bitcoin crashed 50% in less than 48 hours.
Wu claims that Babel claimed that its business was to provide USDT loans to Bitcoin miners at a loan-to-value ratio of 50% to 65%. The miners would deposit the BTC as collateral, which the company would then use as collateral to borrow the USDT which it would then lend to the miners, profiting by charging higher interest rates than it accesses the funds. But Wu alleges that Babel’s business model relied on raising funds from users to profit from rising Bitcoin prices, with the company using put options to hedge risk.
Also on June 18, Twitter user crypto_threader cited allegedly leaked recordings of Babel founder Del Wang saying “customer savings” were used to bail out the company after the Black Thursday crash.
“We went 3x long to [$]3,000, and added more to [$]4,000 using BTC as collateral to borrow,” the transcript reads. “Most of the position is not even our money.”
If the transcript is authentic, it indicates Babel’s willingness to leverage user funds to speculate on the price of BTC, suggesting that it could have gotten into trouble again amid the recent downturn.
At the time of the 2020 crash, the company was saved by partnering with centralized stablecoin issuer Tether, which agreed not to call Babel margin in exchange for gradual repayments over time. “Unlike last time, there is no longer a savior, as Tether says he is no longer working with him,” Wu wrote.
The Defiant has contacted Maple Finance and Babel Finance for further comment, but has not yet received a response. This article will be updated accordingly.