Key Highlights
- Chaos Labs revealed that World Liberty Financial is using a complex looping strategy involving over $1 billion in borrowed assets, raising transparency concerns.
- The WLFI team now accounts for over 80% of Dolomite’s total value locked and borrowing activity, creating major concentration risk.
- With borrowing near the cap, Merkl rewards ending, and a token unlock ahead, market pressure on WLFI could intensify further.
World Liberty Financial, the Trump-linked DeFi venture, is back in the spotlight, and the past 24 hours have been brutal. Hours after Justin Sun, the Tron founder, accused the project of treating users as a “personal ATM” and WLFI fired back with a “see you in court” threat, Chaos Labs entered the chat with its own concerns.
The risk firm published a detailed on-chain breakdown of WLFI’s borrowing activity on Dolomite, opening with a sharp line that set the tone. “You know it’s serious when Justin Sun starts making allegations.”
Borrowing is almost at the cap
The collateral cap for WLFI on Dolomite sits at 5.1 billion tokens, and the World Liberty Financial team is now almost fully using it. The activity is split across two multisig wallets. The first, 0x44a6, is a secondary multisig. The second, 0x5be9, corresponds to the team’s main multisig and is doing most of the heavy lifting.
Dolomite, for context, was founded by Corey Caplan, who also serves as CTO of World Liberty Financial. The protocol allows borrowing against WLFI with a liquidation threshold set at 66% of collateral value. As The Crypto Times reported in January, WLFI launched its lending markets on Dolomite earlier this year, which made the protocol the natural home for its treasury activity.
The position structure nobody is talking about
The Chaos Labs breakdown digs into something the earlier coverage missed. Most of the public discussion around WLFI’s borrowing has glossed over the actual structure of the positions, which is more layered than a simple collateral swap.
Wallet 0x44a6 is the simpler of the two. It has borrowed around $40.7 million in stables, mostly in USD1, the project’s own stablecoin, against 3 billion WLFI valued at roughly $242 million at the time of writing. That works out to a liquidation threshold requiring about a 75% drop in WLFI price.
Wallet 0x5be9 is where things get interesting. It holds two positions at once. The first is $111 million in USD1 borrowed against a mix of $161 million in WLFI and $98 million in USDC. The second is $89 million in USDC borrowed against $110 million in USD1. In plain terms, the USD1 borrowed in the first position is used as collateral for the second, and the USDC from that second position cycles back as collateral for the first.
The team has not publicly explained why the position is set up this way. Based on the current configuration, WLFI would need to drop by roughly 75% before hitting liquidation, assuming USD1 holds its peg.
Why the loop? A few theories
Chaos Labs laid out a few reads on what this structure is actually doing. One is that the activity is pushing up utilization and rates on Dolomite for both USD1 and USDC, which then incentivizes other users to supply liquidity.
USD1 utilization has climbed to 83.4%, with supply rates at 10.64% once rewards from Merkl, a DeFi rewards platform, are included. USDC utilization is at 90.19%, with supply rates sitting at 9.07%. Borrow rates on both assets have moved into the 5% range, which means most non-WLFI looped strategies are now running at a loss.
The Merkl campaign that is juicing those rewards wraps up in three days. It is also worth noting that Merkl rewards are calculated on net lending, which limits how much the recycled positions can actually generate.
Other possible reasons being floated include liquidity needs, a preference to borrow against USD1 rather than sell or burn it, positioning ahead of the upcoming investor unlock, or quietly preparing for an exit under current risk parameters.
The market implications
Mid-to-high LTV borrowing against governance tokens is not new. Dolomite itself offers similar terms on assets like CRV. But the Chaos Labs review flagged three things that make the WLFI setup worth a closer look.
First, the quantity of WLFI now sitting as collateral on Dolomite is more than four times the total WLFI available on Binance, the world’s largest crypto exchange.
Second, while WLFI’s headline market cap looks larger than assets like AAVE and CRV, its effective circulating supply and actual trading liquidity across both centralized and decentralized venues is significantly lower.
Third, only 20% of WLFI has been unlocked for investors so far. The remaining 80% is waiting on a governance decision expected in mid-April. Most of the supply, in other words, is not participating in price discovery at all. Investors currently sitting at around 1.88x ROI may decide to take profits once tokens unlock.
The concentration problem
This is probably the most striking number in the whole breakdown. World Liberty Financial accounts for 82.7% of total TVL supplied to Dolomite and 85.3% of total assets borrowed.
The same entity is supplying the collateral, taking out the loans, and recycling liquidity across a small cluster of addresses. The protocol’s stability is now effectively tied to how one project manages its treasury. As The Crypto Times reported on April 11, the WLFI token had already dropped 15% to an all-time low of around $0.082 as the market started pricing in this exact concentration risk.
What happens next
After public scrutiny picked up, the WLFI team repaid about $10 million in USD1 and said it is willing to post more collateral if required. This came shortly after the team publicly defended its position on X, calling the concerns “FUD” and insisting it was “nowhere near liquidation.”
Multisig 0x5be9 still holds roughly $1.02 billion in additional WLFI that could be deployed as collateral if the cap gets raised. It also has around $27 million in USD1 that could be used for further repayments.
The bigger question is what happens after the mid-April unlock proposal is formally introduced. With the Sun feud now spilling into a possible legal battle, Merkl rewards about to roll off, and borrowing already scraping against the cap, this situation still has room to develop.
Also Read: Justin Sun Claims WLFI Has a “One-Signature” Wallet Freeze Power
