Bad Debt Piles up at DeFi Lending Protocols
Venus Protocol and Iron Bank Incur Eight-Digit Liabilities as MakerDAO Keeps a Clean Sheet
By: Samuel Haig •Dive
In a year when a bear market pummeled crypto investors and bankruptcies spread contagion through the DeFi sector, it was only a matter of time before the bill would come due.
That time, it appears, is now.
Bad debt is piling up at many decentralized lending protocols, according to data from RiskDAO. This includes top money markets Aave, Venus, and Abracadabra.
Venus Protocol tops the list with $52.M worth of bad debts, followed by Iron Bank with more than $27M, and Inverse Finance with almost $15M. Inverse Finance and Iron Bank have the highest debt-to-TVL ratio with 85% and 13% respectively.
Venus experienced a string of liquidations totalling $200M in May 2021 and was saddled with $100M in bed debt; some of the red ink on its balance sheet may date back to that event.
Abracadabra incurred $12M of its bad debts amid the collapse of Terra and its UST stablecoin, according to Autism Capital, a popular crypto analyst. Autism tweeted that the debts stemmed from liquidations that could not be processed fast enough to keep up with rapidly changing market conditions.
MakerDAO, a collateralized debt protocol is the exception, comprising the only lending protocol with a total value locked of more than $10M that has zero bad debt on its books, according to RiskDAO.
Crypto lending protocols with largest sums of bad debt incurred. Source: RiskDAO
Sam KazemianSam Kazemian, the founder of Frax, told The Defiant that Fraxlend has no bad debt and a TVL exceeding $50M. Fraxlend is not included in RiskDAO’s dashboard.”
The protocols Compound, Inverse Finance and Aave did not immediately respond to requests for comment. Representatives for Venus, Iron Bank, and Abracadabra, could not be reached for comment.
The susceptibility of crypto lending protocols to bad debt, particularly money markets, was thrown into the spotlight when Avraham Eisenberg, a trader, exploited Mango Markets for $116M in October.
The attacker borrowed the protocol’s native MNGO token before executing a trade designed to give the appearance that MNGO had rocketed from $0.03 to $0.91 to Mango’s data oracles. They then borrowed $116M worth of other assets using MNGO as collateral, wiping out all liquidity on the protocol and leaving it with nine-figures worth of bad debt.
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Eisenberg attempted to replicate the same “profitable trading strategy” they had used to attack Mango Markets on Aave, the top money market by TVL, in November. While Eisenberg lost money in his attempt to game Aave’s CRV oracle, the attack left Aave with $1.6M worth of bad debt on its CRV books.
Aave responded by decommissioning asset pools deemed illiquid to prevent other traders from attempting to mimic Eisenberg’s strategy. RiskDAO estimates that Aave has incurred $2M in bad debt in total from 4,924 insolvent accounts.
Compound, the third-largest DeFi money market, similarly placed restrictions on the size of loans taken out from the protocol’s least liquid pools. RiskDAO estimates Compound has incurred $65,710 worth of bad debts from 1,105 insolvent accounts.
Updated on Dec. 13 to report that Fraxlend was not included on RiskDAO’s dashboard.