Uncollateralized Crypto Loans a Ticking Time Bomb: Huobi Research Institute
London, UK
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June 30, 2022 10:00 AM Eastern Daylight Time
The recent insolvency of hedge fund Three Arrows Capital (3AC) has not only led to a cascade of liquidity crises in the crypto industry, but also shone a light on the significant risk posed by uncollateralized crypto loans, according to a new report by Huobi Research Institute.
Titled “Who will be Next to Face a Liquidity Crisis?”, the report gives an analysis of how 3AC’s liquidity crisis was precipitated by its aggressive investment strategies through the use of cycled lending to increase leverage, and poor risk management. After 3AC suffered a US$560 million loss from the Terra-Luna collapse, it ran out of funds to cover its short-term liabilities, resulting in the liquidation of over US$400 million in assets since mid-June. In the wake of 3AC’s insolvency, the interconnected nature of fund managers and large lending protocols contributed to a domino effect that triggered a cascade of liquidity crises in the industry.
The report also flagged a major risk from lending protocols such as Maple Finance and True Finance, which provide uncollateralized loans to institutional customers. Such loans are riskier than loans backed by collateral, as investors who provide the funding could get nothing in the event of defaults.
These uncollateralized crypto loans, which are short-term in nature and stand at US$1 billion, could become a ticking time bomb if borrowers face a liquidity crunch and are unable to repay them. The report cited the example of Babel Finance, which was unable to repay a US$10 million uncollateralized loan from Maple Finance after it halted withdrawals on June 20 due to “unusual liquidity pressures”. Additionally, the report flagged Amber Group and Wintermute Trading, the two largest borrowers in the uncollateralized lending market with borrowings of US$161.3 million and US$163.6 million, respectively.
Huobi Research Institute researcher Johnny Louey, the author of the report, said: “As the crypto market remains quiet in the bear market, more attention should be paid to uncollateralized lending platforms such as Maple Finance and True Finance, as well as their borrowers. If the market gets more bearish, more institutions will see a devaluation of their asset base and run out of liquidity to cover their liabilities. To reduce losses, they would move to secure their collateralized loans which would then put uncollateralized loans in jeopardy – resulting in huge losses for the lending pool investors.
“The contagion effect of the liquidity crises will be severe, and the aftermath is expected to be marked by a further market decline and more serious capitulations. Therefore, the ability of Amber Group and Wintermute Trading to repay their uncollateralized loans maturing in the coming months will serve as a barometer of market sentiment. If the two show signs of loan default, we should expect a cascade of similar liquidity crises to take place.”
To download the full report, click here.
About Huobi Research Institute
Huobi Blockchain Application Research Institute (referred to as "Huobi Research Institute") was established in April 2016. It is committed to researching and exploring new developments in the global blockchain industry. Its goal is to accelerate the research and development of blockchain technology, promote its applications, and improve the global blockchain industry ecosystem. Huobi Research Institute covers industry trends, emerging technologies, innovative applications, new business models, and more. Huobi Research Institute partners with governments, enterprises, universities and other institutions to build a research platform that covers the entire blockchain industry. Its professionals provide a solid theoretical basis and analyze new trends to promote the development of the industry.
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