Maple Finance Opts for Immediate Defaults To Curb Bad Loans

A string of defaults on DeFi lender Maple Finance has triggered a sea of changes to how the protocol handles bad loans


NEOS1AM/ modified by Blockworks


Crypto lending platform Maple Finance has introduced a protocol upgrade, dubbed Maple 2.0, after experiencing two major loan defaults from borrowers on its platform.

Maple Finance, a decentralized credit marketplace running on Ethereum, allows institutional borrowers to take out undercollateralized loans from a credit pool once they meet risk-management criteria. 

But recent hiccups by participants have forced Maple to reconsider its product strategy, modifying the protocol to speed up default processes. In the past, even if a borrower admitted they could not make payments in advance, they were given a grace period before being put into default. 

Now, loans are payable immediately once a borrower meets the condition of default — and if a borrower doesn’t pay within the grace period, delegates (loan underwriters) can liquidate the loan and pool lenders realize a loss immediately whilst pursuing recovery. 

“In the instance when a borrower meets a condition of default, a Pool Delegate will be able to declare an early default. This declaration will bring the loan payable immediately,” Maple said.

“When a borrower doesn’t pay within the grace period the Delegate can liquidate the loan, and all lenders in a pool will realize a loss immediately whilst recovery is pursued.”

Pool delegates must also provide “first loss capital,” funds pegged to go first upon a default. Maple believes this will better align incentives between lenders and delegates; players who spin up a Maple pool will be forced to have skin in the game from the get go.

Other Maple 2.0 upgrades include prorated and scheduled withdrawals, where lenders can request withdrawals at any time instead of waiting a minimum of 30 days to withdraw after depositing.

This move will also lessen potential for gamification, the Maple team wrote in a blog post. 

Interest will also be automatically compounded and reinvested into pools, removing the need for administration and redepositing.

The trigger for Maple 2.0 changes

Maple revealed earlier this month that it would be cutting ties with Orthogonal Trading, a Maple borrower, after it misrepresented its financial position following FTX collapse and failed to meet loan repayments on the platform’s M11 Credit USDC lending pool. 

“The recent default by Orthogonal Trading has made clear the immediate need for improvement on features in the Maple 2.0 upgrade — specifically the need to declare early default on a loan,” M11 Credit wrote in a blog post. Maple will also stop servicing loans on the Solana blockchain, which it began earlier this year.

Another Maple borrower, algorithmic trading and market making firm, Aurous, also missed payments totalling 2,400 wETH ($2.9 million) in the same lending pool.

M11 Credit has since declared default on-chain on credit loans totalling 31 million USDC and 3,900 wETH ($4.7 million)

Outstanding Auros loans will remain in a late, unpaid status after a review on the financial position of Auros deemed “that even without a successful restructure, we should be able to recover a large majority of the assets for liquidity providers.”

A legal recovery process is in the works for Orthogonal Trading losses and withdrawal requests will be processed alongside the Maple 2.0 update. 

“2022 has highlighted opportunities for improvement at a protocol and industry level,” the Maple team wrote. “We hope that Maple 2.0 is evidence of our commitment to continuous improvement and that the Maple team endeavors to be a long-standing, credible ecosystem player.” 

Maple will also adopt another token standard, ERC-4626, for further interoperability and partnerships within DeFi — however it will stop servicing loans via the Solana blockchain, nine months after it began doing so.

A 2023 product roadmap which supports Maple’s objectives will be released in the coming weeks.

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