Author:Chaos Labs

Translation: Deep Tide TechFlow

When @justinsuntron began making allegations, you knew things were serious.

Recent on-chain activities on @Dolomite_io show a sharp increase in lending volume related to @worldlibertyfi. Over the past few days, the team has held open positions on the protocol and significantly expanded their exposure based on this, pushing the collateral utilization of WLFI close to the limit, while triggering a steep increase in stablecoin lending volume.

Dolomite is an EVM lending protocol, founded by @CoreyCaplan3, who also serves as the CTO of World Liberty Fi. The protocol allows for borrowing against WLFI as collateral, with a liquidation threshold set at 66% of the collateral value. Currently, the collateral cap for WLFI is 5.1 billion tokens, which is now almost fully occupied by the World Liberty Finance team through two main addresses: one corresponding to the team’s multisig wallet (0x5be9…), and the other for a secondary multisig wallet (0x44a6…).

Position Structure

Much of the discussion surrounding these positions overlooks their underlying structure:

Wallet 0x44a6 has collateralized 3 billion WLFI (valued at approximately 240 million USD at the time of writing), borrowing approximately 40.7 million USD in stablecoins, primarily USD1. This means the corresponding liquidation threshold would be a price drop of approximately 75% for WLFI.

Wallet 0x5be9 represents the bulk of the lending amount, with a more complex structure, holding two positions:

• Collateralized with a mixed asset of WLFI (161 million USD) and USDC (98 million USD), borrowing 111 million USD in USD1;
• Collateralized with 110 million USD in USD1, borrowing 89 million USD in USDC.

In fact, the USD1 borrowed in the first position is used as collateral for the second position to borrow USDC, and the borrowed USDC is cycled back to the first position as collateral. The logic behind this structure has not been disclosed to the public.

Based on the current configuration, provided USD1 maintains its peg, the price of WLFI would need to drop approximately 75% to trigger a liquidation.

Possible Interpretations

Several interpretations have been put forth:

One interpretation suggests that this action increases the utilization and interest rates of USD1 and USDC on Dolomite, incentivizing users. The utilization of USD1 has risen to 83.4%, with a supply rate of 10.64% including Merkl rewards (the Merkl event will end in three days); the utilization of USDC has reached 90.19%, with a supply rate of 9.07%. The borrowing rates for both assets have risen to around 5%, causing most non-WLFI related circular strategies to fall into negative returns. Notably, the Merkl rewards are calculated based on net borrowing amounts, which limits the degree to which this structure can obtain rewards from circular positions.

Other interpretations include liquidity demand, a preference for borrowing rather than selling or destroying USD1, early positioning before investor unlocks, or preparing for exit under current risk parameters.

Market Impact

Although mid to high LTV lending against governance tokens is not unprecedented (Dolomite itself offers similar parameters for assets like CRV), the structure here is still worth noting:

1. The amount of WLFI used as collateral exceeds four times the total circulation of this token on Binance (the largest exchange).

1. Despite WLFI's nominal market capitalization surpassing assets like AAVE and CRV, its actual circulating supply and trading liquidity on centralized and decentralized exchanges are far lower than these assets.
2. Currently, only 20% of WLFI has been unlocked for investors, with the remaining 80% pending a governance decision expected to take place around mid-April. Therefore, most of the supply has not participated in price discovery. Currently, investors have approximately 1.88x ROI, and may choose to cash out once the tokens are unlocked.

This situation is likely to evolve further following the formal proposal for unlocking.

Latest Developments

Following public scrutiny, the WLFI team has repaid approximately 10 million USD1 and has indicated a willingness to provide additional collateral if necessary. The multisig wallet 0x5be9 still holds an additional 1.02 billion WLFI, which can be deployed as collateral when the collateral cap is raised; it also holds approximately 27 million USD for further repayment.

World Liberty Finance accounts for 82.7% of Dolomite's total supply TVL and 85.3% of total lending assets. In reality, the activities are highly concentrated: collateral is provided by the same entity driving the lending, and liquidity primarily circulates among the same set of addresses.

This situation is still evolving, to be continued.