Decentralized lending protocol Goldfinch is facing fallout from a distressed $20 million cryptocurrency loan as the borrower’s high-risk real estate and digital asset investments unravel.
In February 2022, fintech investment firm Stratos took out the 4-year, 11% interest loan in USD Coin stablecoin through a Goldfinch lending pool managed by Warbler Labs.
But on a post-Saturday, Warbler Labs, a pool manager revealed that $7 million of the loan is now at risk of default. According to the update, Stratos allocated $5 million to real estate startup REZI, which has ceased repayments. The REZI position is expected to be a total loss.
Another $2 million went to unspecified “digital asset investments,” which Warbler claims it was unaware of. Stratos ended up selling at a near-full loss, which it covered by adding collateral.
The remaining $13 million lent to e-commerce firm ThreeColts is said to be performing well. Nonetheless, the losses provoked a crisis.
Warbler has decided to completely backstop investor losses related to the REZI and crypto portions of the struggling loan. The distressed deal highlights the perils of real-world asset tokenization.
Lending crypto against real-world collateral like invoices and property has surged in popularity as CeFi platforms collapsed. However, a lack of transparency and regulation creates immense risk.
Pool underwriter Warbler admitted it was blindsided by some of Stratos’ use of funds, showcasing potential oversight gaps in crypto lending ecosystems.
For Goldfinch, this $7 million credit failure adds to problems with the decentralized management of pooled capital. Earlier loans ended in disaster after questionable lending to crypto hedge funds like Three Arrows Capital.
While Warbler is covering investors this time, decentralized protocols ultimately rely on self-governance by often pseudonymous actors. Without mature controls, crypto RWAs contain amplified uncertainties compared to traditional finance.