The DeFi use case for uncollateralized lending is undergoing 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. As the project tries to reassure investors and customers it is sound, the episode has cast yet another spotlight on the stability of the lending market.
“Questions remain for uncollateralized lenders and the overall state of the DeFi markets as many wonder just how much contagion is out there,” said Mark Monfort, the co-founder of NotCentralised, an Australian group that provides web3 consulting, analysis, and community building services.
Babel, which closed an $80M funding round in June, has a valuation of $2B and has raised $120M in equity financing since 2018 from Circle and other backers. Its troubles come at time of acute stress 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, have been whipping up fears that more disasters are looming.
On June 20, Babel’s team stated that it had alleviated its liquidity situation after reaching preliminary agreements with major counterparties and customers regarding the repayment of debts. Babel also noted it had “carried out an emergency assessment of the company’s business operations to understand the company’s liquidity status.”
“Babel Finance will actively fulfill its legal responsibilities to customers and strive to avoid further transmission and diffusion of liquidity risks,” it added.
On June 21, Maple Finance acknowledged that its Orthogonal USDC pool, managed by one of its clients, has a $10M outstanding loan to Babel, according to an update the venture posted to its site. Launched in May 2021, Maple was among the first crypto-native uncollateralized lending platforms. Clients like Orthogonal Trading use Maple’s technology to make loans. Maple has helped facilitate $1.5B in loans with no late payments or defaults, said Charlotte Dodds, a Maple representative.
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Maple said that Orthogonal has been in daily contact with Babel since the company suspended withdrawals, and that Orthogonal’s focus was on “protecting the interests of lenders,” and committed to sharing updates as the situation progresses.
Dodds told The Defiant the loan to Babel is healthy and the next interest payment is due on July 4.
Twitter user 0xGeeGee responded to the situation. “The first stress test for uncollateralized on-chain lending, wish you guys good luck. Will follow closely,” they said.
Babel is not the first Maple counterparty to experience difficulties amid the recent market turmoil.
On June 13, Maple tweeted that embattled centralized crypto lender Celsius had not borrowed any funds from its pools despite operating as a lender on the platform. Maple said that Celsius is the sole lender for the $20M pool it operates, emphasizing that the pool has no interdependencies with other pools.
Two days later Maple followed up with a statement asserting that many of its borrowers have minimal or zero exposure to Celsius, concluding that any counterparty risk is effectively mitigated.
Maple also said its pool delegates had communicated with borrowers regarding their exposure to Three Arrows Capital (3AC), a multi-billion dollar web3 hedge fund believed to be over-leveraged and under-collateralized on loans borrowed from prominent lenders across the sector.
Maple said that most of its borrowers are unlikely to have direct exposure to 3AC, adding that the borrowers it has spoken with have so far confirmed they have “minimal exposure” to Three Arrows. “As a next step, we will gather updated financial statements from borrowers for month-end in line with our standard practice,” Maple said.
Babel has come under fire for allegedly engaging in risky business practices.
On June 18, reporter Wu Blockchain posted an article noting that the company was nearly wiped out during the “Black Thursday” crash of March 2020, during which the price of Bitcoin crashed by 50% in less than 48 hours.
Wu asserts that Babel purported its business revolved around providing USDT loans to Bitcoin miners at a loan-to-value ratio of 50% to 65%. Miners would deposit BTC as collateral, which the firm would then use as collateral to borrow the USDT they would then loan to miners, profiting by asking for larger interest rates than it accesses funds at. But Wu alleges that Babel’s business model relied on leveraging user funds to profit on rising Bitcoin prices, with the company using put options to hedge risk.
Also on June 18, Twitter user crypto_threader cited alleged leaked recordings of Babel’s founder, Del Wang, stating that “client savings” were used to bail the company out after the Black Thursday crash.
“We went 3x long at [$]3,000, and added more at [$]4,000 by using the BTC as collateral to borrow,” the transcript reads. “Most of the position is not even our money.”
If the transcript is genuine, it indicates Babel’s willingness to leverage user funds to speculate on the price of BTC, suggesting it could have again gotten into trouble amid the recent downturn.
At the time of the 2020 crash, the company was rescued by partnering with centralized stablecoin issuer Tether, which agreed not to margin call Babel in exchange for gradual repayments over time. “Unlike last time, there is no longer a savior, as Tether says it is no longer working with it,” Wu wrote.
Representatives for Babel have not responded to The Defiant’s request for comment.
Update & Correction: Story was updated on June 23 to include comment from Mark Monfort, report that Maple’s lending pool has an ongoing $10M loan with Babel, and to add lending information from Charlotte Dodds, a Maple spokesperson. The headline was also changed to correct that Maple lending pools make loans and not Maple itself, which is a technology platform.