A crypto analyst issues a risk warning for a DeFi altcoin project. In this context, they say that Ribbon Finance’s loan product poses a serious risk to retail lenders. Ribbon loan provides unsecured loan to approved market markers (MM). Also, in cases like Wintermute, the platform failed to take note of the MM’s credit profile.
Altcoin project has capital inefficiency problem
A crypto trader and analyst, nicknamed Forecastoor, evaluated unsecured lending platforms and the risks they pose to retail lenders. The analyst notes that both Ribbon Finance (RBN) and Clearpool Fin have made loans to market maker Wintermute. However, the analyst determined that the rates are different. Ribbon Finance applies an Annual Percentage Rate (APR) of 7%, while Clearpool Fin applies an APR of 11.64% based on Wintermute’s credit profile.
By the way, as you follow on Kriptokoin.com, market maker Wintermute recently lost $160 million to a DeFi hack. It also repaid the $92 million TrueFi loan one day before its due date. The popular market maker has lost a significant amount of money due to hacks in the DeFi ecosystem. As a result, his credit profile was seriously compromised.
Forecastoor suggests that if Wintermute runs into a credit crunch, the market maker will have a high incentive to borrow all of its liquidity requirement from the Ribbon Finance Lending Pool (LP). This essentially means that all lenders will be locked out and unable to withdraw their funds.
Personal lenders need to be careful with Ribbon Finance
Ribbon Finance’s lending product does not have a predefined loan term. That is, there is no deadline for repayment of the debt. Therefore, as long as the market maker repays the minimum interest, it is possible to avoid default. However, this also means that individual lenders will be locked out and unable to withdraw their capital as it cannot be classified as a technical default.
Even if sentiment drops and all liquidity in the pool is withdrawn, retail lenders stand no chance. Because withdrawals operate on a ‘first come, first served’ basis. Therefore, any available liquidity is being removed by Ethereum arbitrage trading bots (MEV bots).
Therefore, the analyst warns retail traders to be careful when lending with Ribbon Finance. He also advises them to be aware of the serious risks that the platform’s lending product poses.
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Suppose Wintermute faces a credit crunch, what would they do?They will have a high incentive to simply borrow the entire liquidity from the LP. Lenders are essentially rugged since they can’t withdraw when the pool liquidity gets emptied.
— forecastooor (@forecastooor) October 17, 2022
At press time, the altcoin is trading at $0.327, up 0.26% on a daily basis, according to CoinMarketCap. However, the altcoin price followed a fluctuating course throughout the day.
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