An Update from Orthogonal Trading on Maple Finance’s USDC 01 Pool

Executive Summary:

  • DeFi model proving resilient. Providing additional information below for added transparency
  • Fully visible liquidity profile for lenders, but near term withdrawal demand exceeds cash on hand. Maturity ladders evenly staggered to facilitate liquidity for accounts looking to re-allocate and buy the dip
  • Loan book remains strong, with no defaults or late payments to date. One issuer representing < 3% of assets is undergoing financial hardship. In constructive talks with Babel Finance regarding additional collateral for their $10m loan.

Recent events across crypto markets have been challenging for most industry participants, so we thought it would be important to take the time to emphasize the differentiation of Maple’s lending design vs. CeFi, provide additional transparency into pool risks, address outstanding LP questions, and provide an update on what we are doing to mitigate risks within our Maple Finance pools.

How Maple Pools are Differentiated vs. CeFi Lending:

Maple’s DeFi model is a transparent remaking of short term lending incentive structures whereby Orthogonal Trading and other Pool Delegates are 100% aligned to manage loans and recover any assets in accordance to the liquidity waterfall. Any losses are taken by the Pool Delegate and other first loss capital before LPs. Moreover, in times of heightened liquidity needs, on-chain lending provides clear insight into maturities that can meet withdrawal demands over time. The combination of smart contract rules and risk tranching avoid the need for a messy liquidity unwind that has historically plagued traditional finance and is now occurring at CeFi institutions.

Traditional bank liquidity relies heavily on demand deposits whilst funding long term loans, creating asset-liability mismatches which require government insurance to backstop. Meanwhile, private credit funds lock funds for extended periods. Maple lending pools offer better liquidity than TradFi credit funds by managing liquidity in a transparent, fair, and operationally efficient manner using smart contracts. Traditional banks during the GFC worked behind closed doors and the CeFi banking model is no different.

Near Term Liquidity:

Maple pool liquidity is structured to strike a balance between capital efficiency for all LPs and near-term liquidity for LPs looking to withdraw. The protocol has a 10 day cool down cycle for any address that has exceeded the 90 day lockup period. After 10 days, there is a two day window to withdraw funds before expiry. In the event that cash is not available, LPs will need to re-trigger to withdraw.

Withdrawals over the next ten days exceed cash + maturing loans in the pool. Given a withdrawal trigger is the right, but not obligation to withdraw, we cannot give exact timing of when all withdrawals will be met, but can provide a range for those accounts in cooldown. As of June 22nd, that range would be a maximum of 75 days. Note, this is a maximum based on every dollar triggered withdrawals 100% from the pool. During the Terra/Luna crisis in May, we saw heightened liquidity demand resulting in elevated cooldown triggers, but actual triggers of less than 40% of withdrawal requests.

The pool is structured to have ladders evenly distributed across time to optimize for capital efficiency in normal times, but in these exceptional circumstances it will take us time to build cash as maturities are paid. Below you will find details of near term maturities that will meet withdrawal requirements over the next few months.

Chart of loan maturities which can meet withdrawals, grouped into 10-day buckets. Over half the loan book matures before the end of August.

High Quality Loan Book:

We have been in continuous communication with all of our borrowers and are confident the loan book and the design of Maple Pools will result in favorable outcomes for all lenders, far different than what we are currently seeing across CeFi institutions.

To provide additional transparency into the loan book, we have compiled relevant leverage data by sector (Market Makers, Arbitrage Funds, and Diversified) in order for lenders to better understand the loan book’s health and trends. The below chart highlights the average and range of leverage across our Arbitrage Fund borrowers. Leverage has increased YTD but remains well within our underwriting limits.

And below you can find similar metrics for Market Maker borrowers. Leverage (as measured by debt to equity) in this group tends to run higher, which is consistent with our belief that market making businesses tend to be less risky than a typical arbitrage fund given greater diversification across a number of operational risks we focus on from trade sizing and volume to counter-party concentrations.

Our loan book also has exposure to more diversified crypto financial institutions which includes borrowers with market neutral trading desks along with adjacent businesses ranging from asset management, directional crypto exposures, or retail deposit apps. Given the more complicated nature of such organizations, we allow for much tighter lending allowances as highlighted below and prefer to use debt-to-adjusted liquid assets (risk-weighted by illiquidity and asset quality) as our core leverage metric in addition to diligence on asset quality and liquidity.

Note: Most recent financial data is less than 60 days old.

In general, leverage measured as Debt to Equity and Debt to Assets has increased between YE ’21 and most recent closed periods, but remains well within our leverage comfort zones. Moreover, upon speaking with our current borrowers during the past few weeks, we expect leverage profiles to decline over the coming weeks/months as more firms look to deleverage and CeFi institutions pull lending contracts. This has resulted in a c. 400–500bps widening in credit spreads to c. 10–12% prospective USDC yields on 90–180 day tenors in the current environment.

Financial leverage can be measured in many ways, and while the above leverage metrics are instructive, credit risk is a vector and not a finite value. This is one of the many reasons we are big believers in the delegated model of Maple Finance. You can be sure we will continue to focus our attention on all aspects of the due diligence process, highlighting risks across various spectrums from liquidity risk, to enterprise risk, counter-party risk, smart contract risk, concentration risk, DeFi risk, financial reporting risk, and directional/market beta risk, to name just a few.

Risk Mitigation on our $10m Loan with Babel Finance:

We have been in active dialogue with Babel Finance founders as they work to remedy their liquidity issues. There have been no missed payments and conversations with large creditors are ongoing.

Our near-term priority is to seek early repayment or to obtain collateral to minimize exposure. While a debt haircut is not our base case, should it occur, we have first loss capital in place to mitigate losses. Loan losses are expected over the long term in any institutional lending business, and are priced into the interest rate charged to borrowers such that lenders still earn a positive spread.

Thank you for being a part of the Maple community and entrusting Orthogonal Trading as Pool Delegate. We are excited to continue this journey of bringing unsecured lending on chain. If you have any follow-up questions, suggestions, or would like to schedule a call to discuss in more detail with the team, please contact Credit@orthogonal.trading.

Thank you and best,

Orthogonal Trading Ltd.