Orthogonal Trading defaulted on eight loans totaling $36 million on unsecured lending protocol Maple Finance as funds were locked up by FTX.
As a major ecosystem player at Maple Finance, its default affected approximately 30% of active loans in the protocol. Maple Finance is canceling Orthogonal Trading as a borrower on the Maple Finance platform, simultaneously canceling Orthogonal Credit as a principal and closing the lending pool.
Where does the breach come from
According to a Maple Finance spokesperson, most of the defaults (approximately $31 million) occurred in the M11 USDC pool.
The M11 USDC pool is operated by an independent company called M11 Credit. This would result in a loss of about 80% for the rest of the investors in the pool. There is $5 million remaining in the M11 WETH pool. Other pools are not affected.
According to M11 Credit, Orthogonal Trading repeatedly falsely reported its financial situation to M11 Credit in November, telling M11 Credit that it only held $2.5 million in FTX exposure. However, it was only informed on December 3 that it could not repay the loan because it locked up more money on FTX and has been operating while effectively insolvent.
M11 Credit has therefore decided to sever all ties with Orthogonal Trading. M11 Credit said the misrepresentation violated Maple’s agreement and will pursue all appropriate legal avenues to recover funds, including arbitration or litigation if necessary.
Maple Finance founder Sid Powell said he was shocked and disappointed by the incident. He acknowledged the need for stricter due diligence when it comes to unsecured loans, and said the platform might consider introducing partially secured loans.
Powell emphasized that the protocol locks each pool’s funds in separate smart contracts, meaning they don’t mix together. Therefore, the loss is limited to each affected mining pool. In stark contrast to FTX’s debacle, the loss of Alameda Research affected FTX clients.
Orthogonal Trading’s role on Maple Finance
Maple Finance is a decentralized protocol that enables institutional investors to obtain unsecured or partially collateralized loans. Eligible companies are able to create their own loan pools where approved investors can access loans on demand.
Orthogonal Trading is a company that operates both a crypto hedge fund and a credit business. It interacts with Maple Finance in two ways.
The credit arm, Orthogonal Credit, operates as a principal, meaning it performs due diligence on investors applying for access license agreements. It runs a USDC lending pool that originated $850 million in loans with a 1.2% default rate.
Trading arm Orthogonal Trading operates as a borrower on the platform, using it to access credit. The trading desk does not take any loans from the pools operated by its credit desk.
Orthogonal Trading and Orthogonal Credit
Orthogonal Credit and Orthogonal Trading operate independently as Pool Delegate and Borrower respectively.
Orthogonal Credit said in a statement that it operates independently of Orthogonal Trading and is not aware of its exposure to FTX. “As far as we know, Orthogonal Trading misreported their risk exposure, so the M11 Credit team had to take immediate action to issue a notice of default,” said Orthogonal Credit. The assets in the pool continue to be protected by Maple’s smart contract infrastructure and are independent of Orthogonal Trading .
Maple Finance expects to recover at least $2.5 million to mitigate losses, a Maple Finance spokesman said. This will come from pool default insurance and fees incurred by Orthogonal remaining on the platform.
