FTX Contagion Spreads as Orthogonal Trading Gets Default Notice for $36M Debt on Maple Finance

Maple Finance, a big blockchain-based lending platform, severed ties with crypto firm Orthogonal Trading, alleging that it was "misrepresenting its financial position."

The move came after Orthogonal was due to pay back a $10 million USDC stablecoin loan from a credit pool managed by M11 Credit on Dec. 4. Orthogonal has been a significant borrower on Maple, and also was a manager and underwriter of a credit pool on Maple.

M11 Credit has issued a notice of default to Orthogonal for all active loans outstanding from that particular USDC stablecoin pool on Maple, with $31 million of current liabilities in four loans. The default notice also extends to Orthogonal's wrapped ether (wETH) loans worth of $5 million (3,900 wETH) from another M11 Credit-managed lending facility on Maple, M11 Credit confirmed to CoinDesk.

Maple said in a statement that Orthogonal has been "operating while effectively insolvent," and didn't communicate that it would be unable to service the debt.

"Misrepresentation like this is in violation of Maple’s agreements, and all appropriate legal avenues to recover funds will be pursued including arbitration or litigation as necessary," according to the statement.

An email from CoinDesk requesting comment from Orthogonal wasn't immediately returned.

A default by Orthogonal could deal another blow to undercollateralized lending protocols, grappling with liquidity crunch and the fallout of from the implosion of Sam Bankman-Fried's FTX crypto exchange.

Orthogonal's lapse marks the second time a borrower defaulted on Maple after Babel Finance's failure to service its debt in June. Earlier this fall, crypto firms Blockwater and Invictus Capital defaulted on their loans on rival unsecured lending protocol TrueFi.

Read more: TrueFi's $4M Bad Debt in Limbo Shows Risk of Crypto Lending Without Collateral

The string of defaults highlights the risks and shortcomings of the business model of unsecured lending on platforms such as Maple. These loans don't require the borrower to pledge any assets against the debt that could be automatically confiscated – or liquidated as collateral – in the event of a default.

Instead, the loan is granted essentially based on a borrower's creditworthiness alone – considering things like financial standing and due diligence performed by the loan's underwriter, usually the manager of the credit pool.

"Orthogonal's default showcases how uncollateralized loans in [decentralized finance] are still reliant on centralized parties for underwriting, antithetical to the ethos of transparency and decentralization," Walter Teng, vice president of digital assets at market research firm Fundstrat, told CoinDesk.

Losses from FTX implosion

M11 Credit wrote Monday in a blog post that it was informed by Orthogonal on Dec. 3 that it "incurred larger losses than previously disclosed" due to funds held on FTX, the crypto exchange that imploded last month, and as a result was unable to repay its debt as a borrower.

"We are extremely shocked and disappointed by the actions of Orthogonal Trading," M11 Credit's statement said. "Purposefully misstating information during the numerous contacts we have had over the last weeks severely impacted our ability to manage our outstanding credit risk."

M11 Credit is a subsidiary of investment firm Maven 11 Capital, which focuses on investing in blockchain and distributed ledger technology, according to its website.

Bad debt on Maple

Orthogonal has been actively involved in lending and borrowing on Maple. Out of the five separate lending pools on Maple with a total of $112 million of active loans, Orthogonal was a borrower from two of the pools and managed a third.

Orthogonal's $31 million outstanding loans from the M11 Credit USDC lending pool represents some 80% of the $38.5 million active loans in the pool.

On top of that, Orthogonal also has four active loans of 3,900 wETH in total, worth some $5 million, from another M11 Credit-managed credit pool on Maple. These loans take up some 18% of the pool's $28 million of outstanding debt.

Orthogonal also acted as the manager of another Maple credit pool for USDC, which has $30 million of active loans. Since May 2021, it has originated $563 million in loans, including to FTX's corporate sibling trading firm Alameda Research. In November, when Alameda filed for bankruptcy with FTX, Orthogonal pointed out that it had discontinued lending to Alameda earlier this year after identifying key weaknesses during due diligence.

In the statement, Maple said it had issued a notice of termination to Orthogonal in its role as manager of that pool.

Maple Finance and M11 Credit were already dealing with the embattled market maker Auros Global's failed repayment of a loan from the wrapped ether pool, citing "short-term liquidity issue as a result of the FTX insolvency."

A five-day grace period for Auros to pay back a $3.1 million wrapped ether loan expires Monday. M11 Credit extended the maturity date twice for two loans totaling to $10 million, which were due in early November.

Generally speaking, when a big borrower defaults on a loan from Maple, the creditors for that pool end up taking a loss.

In July, after Maple liquidated Babel Finance's defaulted $10 million loan, creditors in the pool stomached a $7.9 million loss, which translated to a 3.2% haircut on the $244 million total deposits in the pool.

UPDATE (Dec. 5, 15:50 UTC): Added paragraphs about M11 Credit's statement and Orthogonal's outstanding loans from M11 Credit.

UPDATE (Dec. 5, 19:10 UTC): Adds that Orthogonal also owed $5 million to a wrapped ether credit pool managed by M11 Credit.