The liquidity crunch spreads to crypto lending after institutional borrowers maxed out their credit pools

Key points: 

• Some institutional crypto equity firms received a "warning" label on their respective Polygon Permissionless pools on Clearpool as they reached 99% of the maximum credits available in the protocol.
• They are concerned that liquidity issues at crypto trading firm Alameda Research could spill over to crypto lenders.
• The total debt on these loans is $14.8 million.

Some institutional crypto equity firms have exhausted their loan pools on Clearpool, an unsecured lending protocol, amid growing concerns that liquidity issues at crypto trading firm Alameda Research could spill over to crypto lenders.

Amber Group, Auros, and LedgerPrime received a "warning" label on their respective Polygon Permissionless pools on Clearpool as they reached 99% of the maximum credits available in the protocol. Folkvang and Nibbio’s Ethereum Permissionless pools also received warning status.

The total debt on these loans is $14.8 million, according to Clearpool's credit dashboard.

The five cryptocurrency companies involved did not immediately respond to requests for comment.

There are growing concerns that Alameda Research's deepening financial woes could lead to a liquidity crisis in the broader digital asset market, similar to the demise of Terra blockchain or the explosion of crypto hedge fund Three Arrows earlier this year. Alameda is the sister company of troubled cryptocurrency exchange FTX, which rival exchange giant Binance tried to bail out earlier on Tuesday. Its balance sheet is full of FTT tokens, which plummeted 80% in a single day.

Clearpool is a well-known unsecured lending protocol where cryptocurrency trading firms often open lines of credit and borrow for their trades. Borrowers don't have to pledge any assets in return, and loans are backed by their reputation and so-called good credit.

In these types of crypto lending pools, the interest rate is dynamically set based on how much money is withdrawn from the pool. When borrowers approach the upper limit of their credit limit, the protocol penalizes them by increasing the loan interest rate from the usual 8-10% to an annual interest rate (APR) of 20-25%.

Taking the largest amount of debt out of these DeFi protocols is the real-world equivalent of running out of credit cards, which could be a sign of broader financial distress in the market.

“Cryptocurrency lenders are feeling the credit crunch from the Alameda bankruptcy,” Walter Teng, vice president of digital assets at research firm Fundstrat, told.

Alameda's DeFi Debt

Alameda Research has been a prolific user of decentralized lending protocols and has issued hundreds of millions of unsecured loans to date. However, DeFi protocols currently have smaller amounts of outstanding debt compared to earlier this year, meaning investor funds are at risk if Alameda defaults on its loans.

The trading firm raised two loans totaling $5.5 million from Apollo Capital and Compound Capital Management using Clearpool’s permission pool, according to Clearpool’s data dashboard.

According to TrueFi's lending dashboard, it also borrowed $7.3 million from the TrueFi lending pool, which is due on December 20. The next interest payment is due on November 20.

Maple Finance's loan pool currently has no active loans to Alameda, although Alameda's loan pool has $288 million in loans through spring 2022.

This year, a string of cryptocurrency bankruptcies has raised questions about the viability of unsecured lending in the nascent, volatile digital asset market. When an unsecured loan defaults, creditors cannot immediately recover any assets. Creditors are only partially compensated by the agreement, requiring them to resort to debt restructuring or to court to get their money back.

“Ironically, this second case of massive deleveraging through crypto underscores the need for the transparency that DeFi provides,” Teng said.