- Ribbon Finance, a suite of DeFi protocols that supports traders poses serious risks according to analysts.
- The platform is providing undercollateralized lending for market makers like Wintermute, and suffers from capital inefficiency.
- Analysts argue that in the event Wintermute faces a credit crunch, retail lenders won’t stand a chance to recover their funds.
Analysts believe Ribbon Finance’s lend product is a serious risk for retail lenders. Ribbon lend offers uncollateralized lending to approved market markers (MM) and in cases like Wintermute, the platform failed to take note of the MM’s credit profile.
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Ribbon Finance’s lending platform has a capital inefficiency problem
Forecastoor, a pseudonymous crypto trader and analyst evaluated uncollateralized lending platforms and the risks they pose to retail lenders. The analyst identified that both Ribbon Finance and Clearpool Fin have lent to market maker Wintermute however the rates differed. Ribbon Finance charges 7% Annual Percentage Rate (APR) while Clearpool Fin charges 11.64% APR based on Wintermute’s credit profile.
Marketmaker Wintermute recently lost $160 million to a DeFi hack and repaid its $92 million TrueFi loan one day before the due date. The popular market maker has lost considerably large sums of money to hacks in the DeFi ecosystem and its credit profile is severely compromised.
Forecastoor argues that in the event that Wintermute faced a credit crunch, the market maker would have a high incentive to borrow its entire liquidity requirement from the Ribbon Finance Lending Pool (LP). This would essentially mean all lenders would be locked in and unable to withdraw their funds.
Ribbon Finance’s lending product has no predefined loan tenure – meaning deadline for repaying the debt – therefore as long as the market maker pays back minimum interest, they can avoid default. However, this also means retail lenders would remain locked in and unable to withdraw their capital since it could not be classed as a technical default.
Retail lenders stand no chance even if the sentiment turns bearish and all liquidity from the pool is withdrawn. Withdrawals are processed on a first-come-first-serve basis and any available liquidity will therefore get removed by Ethereum arbitrage trading bots (MEV bots).
Retail lenders need to be cautious with Ribbon Finance
The analyst therefore recommends that retail traders be cautious when lending with Ribbon Finance and be aware of the serious risks possed by the platform’s lending product.
5/
— forecastooor (@forecastooor) October 17, 2022
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.
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