Nexus Mutual Loses Millions in Maple Finance Credit Pool

Nexus Mutual may be short $10 million after borrowers failed to repay loans to M11’s wETH pool




Smart contract insurance platforms Nexus Mutual and Sherlock will be taking losses in investments on DeFi credit pool Maple Finance.

Maple revealed earlier this week it is cutting ties to cryptocurrency trading firm Orthogonal Trading, which misrepresented its financial position and exposure to FTX contagion and was unable to meet loan repayments to the platform’s M11 Credit USDC lending pool. 

M11 Credit also serves as pool delegate for a WETH lending pool with exposure to Orthogonal Trading, which includes ether supplied by the DeFi insurance protocol Nexus Mutual.

Nexus has initiated withdrawals from the M11 pool, but the company noted in a blog post that the expected loss is estimated to be around 2,461 ETH or 1.5% to 2.6% of the protocol’s assets.

In August, the company deposited 15,348 ETH (around $19.4 millon) into M11’s wETH pool after a governance vote which received 99% acceptance from community members, and some observers speculate the final loss may end up being worse.

No Snapshot vote was conducted, meaning the protocol went straight to “on-chain” votes after addressing community questions on the groups’ governance forum.

A spokesperson for Nexus Mutual told Blockworks that while proposals related to the DAO treasury make use of Snapshot governance, changes to the protocol or capital pool investment allocations require an on-chain vote.

According to pseudonymous Twitter user DeFiyst, more than 69% of deposited ETH remains in the M11 wETH pool.

Orthogonal Trading makes up 17.6% of the M11 wETH pool’s loans and Auros, an algorithmic trading and market making firm which is also in trouble, makes up 37.8% of the pool loans. 

Despite being given two loan repayment extensions, Auros has failed to cough up payments for a 2,400 wETH loan and a 6,000 wETH loan from the pool. 

It is likely that the market making protocol has, too, been caught up in the FTX contagion.

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If this is the case, the total M11 wETH pool loss amounts to an estimated 12,300 ETH, an implied loss of roughly $10 million for Nexus Mutual.

These losses, if realized, serve as a warning to ​​reputation-based lending moving forward, Blockworks Research analyst Ryan West tweeted. 

“Loans need to be collateralized by assets or cash flow, and LTVs need to be calculated based on risk,” he said.

Sherlock staked funds to chase yield

Sherlock is a smart contract auditing platform with a twist: DeFi users interested in yield can stake USDC to insure protocols that the team has audited.

“Stakers take on the risk of payouts for protocols covered by Sherlock,” according to a Sherlock blog post. “Basically, protocol teams pay “premiums” to Sherlock in order to have the privilege to submit claims when a covered smart contract hack occurs in their protocol.”

Some of the estimated 10% APY yield, paid in USDC, was derived from Maple Finance “yield strategies.”

Among those strategies was exposure to the M11 Credit USDC pool and according to Sherlock co-founder Jack Sanford. Sherlock anticipates a loss of 4 million USDC as a result of the Orthogonal Trading default, representing about 35% of the staking pool, Sanford wrote on the project’s Discord Monday.

“I am truly sorry on behalf of Sherlock for the loss in the Maple pool,” Sanford wrote. “And I think Sherlock will need to take drastic action to create a better staking pool setup in the future, that doesn’t rely on competing with the highest APY of the day.”

Sherlock provides a dashboard which shows the allocation of stakers USDC used to generate yield.

But some community members expressed frustration in the group’s Discord, arguing that the risks to their staked USDC were not made clear.

“Things were not clear to begin with, nor were any of the risks other than from being a staker in the smart contract insurance fund,” wrote one pseudonymous user in the group’s general channel. 

Sanford noted, “Sherlock’s main focus is smart contract security risks.”

“Assessing the risks of CeFi institutions is not our strength. We trusted that M11 Credit was adept at this, but it was shown that they were not.”

Macauley Peterson contributed reporting.

Correction, Dec. 7 2021, 12:20 p.m. ET: Nexus Mutual’s capital pool investment allocations do not use Snapshot governance for community feedback because they require an on-chain vote.

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