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Maple Finance: What Happened?

On December 5, 2022, The Block reported that Orthogonal Trading had defaulted on $36 million of loans on crypto lending protocol Maple Finance after the investing firm's funds became tied up on bankrupt exchange FTX.

Why is this a big deal?

Orthogonal Trading’s default is another link in the chain of contagion after the collapse of FTX. In response, Maple has severed ties with Orthogonal Trading, the parent entity that runs both a crypto hedge fund and a credit business.

Maple Finance’s smart-contract based lending model is unique and worth diving into. Here is why.

“CeFi” refers to the array of custodial financial institutions that operate in crypto markets that effectuate financial activities on behalf of customers. These businesses are similar to traditional financial institutions (“TradFi”).

While Maple Finance may not directly fall into this boat, its model straddles the non-custodial and custodial worlds. While it uses smart contracts to pool users’ money (similar to DeFi protocols), each pool of assets available for lending has a managing underwriter (i.e., a business) that makes lending decisions (unlike a DeFi protocol which runs on software).

In this particular situation, Orthogonal is a debtor who defaulted on a loan of pooled assets, and M11 Credit decided to loan the money to Othogonal.

So net net, Maple isn’t akin to over-collateralized code-based protocols like the Compound and Aave protocols because the system relies on the judgment of individuals to allocate credit. To ensure DeFi can increase economic access for everyone by making the digital economy fairer, more transparent and more equitable, it’s important to differentiate DeFi protocols from systems that rely on discretionary decision-making.

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