Venus Protocol and Iron Bank incur 8-figure debt as MakerDAO keeps a clean sheet
In a year where a bear market swept through crypto investors and bankruptcies swept the DeFi sector, it was only a matter of time before the bill came due.
That time, it seems, is now.
According to data from RiskDAO, bad debts are piling up on many decentralized lending protocols. These include the top money markets Aave, Venus and Abracadabra.
The exception
Venus Protocol tops the list with $52 million worth of bad debt, followed by Iron Bank with more than $27 million and Inverse Finance with almost $15 million. Inverse Finance and Iron Bank have the highest debt-to-TVL ratios at 85% and 13%, respectively.
Venus experienced a string of liquidations totaling $200 million in May 2021 and was hit with $100 million in bed debt; Some of the red ink on his balance sheet may be due to this event.
market conditions
According to Autism Capital, a popular crypto analyst, Abracadabra suffered $12 million in bad debt during the collapse of Terra and its UST stablecoin. Autism tweeted that the debt came from liquidations that could not be processed quickly enough to keep up with rapidly changing market conditions.
MakerDAO, a secured debt log, is the exception and includes the only loan log with a total locked value of more than $10 million that RiskDAO says has no bad debts on its books.
Crypto lending logs with the largest amounts 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 of over $50 million. Fraxlend is not included in the RiskDAO dashboard.”
The Compound, Inverse Finance, and Aave protocols did not immediately respond to requests for comment. Representatives from Venus, Iron Bank and Abracadabra could not be reached for comment.
Eisenberg effect
The vulnerability of crypto lending protocols to bad debts, particularly money markets, was brought into the spotlight when Avraham Eisenberg, a trader, exploited Mango Markets for $116 million in October.
The attacker borrowed the protocol’s native MNGO token before executing a trade intended to make it appear that MNGO had gone from $0.03 to $0.91 for Mango’s data oracle. They then borrowed $116 million worth of other assets using MNGOs as collateral, wiping out all of the protocol’s liquidity and leaving it with bad debts in the nine figures.
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Eisenberg attempted to repeat the same “profitable trading strategy” they used to attack Mango Markets on Aave, TVL’s top money market, in November. While Eisenberg lost money trying to trick Aave’s CRV oracle, the attack left Aave with $1.6 million in bad debt on his CRV books.
Aave responded by shutting down asset pools deemed illiquid to prevent other traders from attempting to emulate Eisenberg’s strategy. RiskDAO estimates that Aave incurred a total of $2M in bad debt from 4,924 bankrupt accounts.
Compound, the third-largest DeFi money market, similarly imposed limits on the amount of credit borrowed from the protocol’s least liquid pools. RiskDAO estimates that Compound received $65,710 worth of bad debts from 1,105 insolvent accounts.
Updated December 13th to report that Fraxlend was not included in RiskDAO’s dashboard.
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