It’s no secret that June 2022 was challenging for markets. We saw rising energy and service prices, which added urgency to the Fed’s plan to tighten monetary policy. Stock markets cooled, and this had an impact on crypto markets. Bitcoin and Ether returned to 2020 pricing levels, generally following equity markets. Several large players in the borrowing and lending space faced significant setbacks. During this time, one of the only places investments have gone up in value is on Donut’s Save and Build plans, where users continued earning 4% and 5% APYs.
Frequently Asked Questions
How have falling prices in the crypto market impacted Donut?
Falling prices impact the value of the collateral on loans. Typical collateralization is between 125-150%. As prices fall, borrowers are asked to top up their collateral when the ratio nears 110%. If a borrower does not top up collateral, our lending partners liquidate their holdings to ensure no principal is lost. Donut’s lending partners have been performing as expected, showing resilience in today’s market.
How does overcollateralization protect our funds when crypto prices crash?
When funds are loaned across digital markets, borrowers are required to overcollateralize their loan by about 125% - 150%, or more. This protects your principal and interest earned in case of borrower default. If the value of the collateral falls, borrowers are margin called and required to top up or repay part of their loan. If they cannot do this, they are automatically liquidated, which protects your principal.
What is a margin call?
A margin call occurs when the value of crypto assets falls below a certain threshold. Borrowers are asked to top-up their collateral, or risk getting liquidated.
What happens to Donut when collateral drops below the threshold and loans are margin called?
Our lending partners may put out short sell positions on the crypto collateral to limit any potential losses. They then give the party being margin called some time to top up their collateral. If they don’t, the loan is liquidated.
Have any margin calls not been met?
Yes, this was the case for our lending partners that had relationships with 3AC and Babel. The positions were liquidated and no losses were incurred.
Who does Donut lend to?
To power Save, we partner directly and indirectly with regulated US custodians Wyre, Genesis, and Abra, as well as US fintech Synapse. For Build, we allocate funds to the same partners as Save, while also lending across decentralized markets with Yearn.
Has Donut been impacted by 3AC, Celsius, & Babel?
No, Donut has not been impacted by 3AC, Celsius, & Babel. We mitigate risk by working with trusted institutional lenders and through overcollateralization.
What’s the difference between high APY offerings from Celsius and Donut?
On the surface, our offerings appear similar. Behind the scenes, we have different lending practices.
Celsius reportedly uses a practice called "rehypothecation" where they re-purpose clients' collateral to increase their leverage. This means they take collateral deposited by their users and post it as collateral of their own. This allows them to pay out higher rewards. During a market downturn when the price of this collateral falls, they risk not being able to meet margin calls and liquidation. Since they are using their users collateral as their own, when they are liquidated, so too are their users funds. Celsius also has some equity positions in the hundreds of millions of dollars that are locked up for months which puts them under a liquidity crunch if users withdraw simultaneously.
At Donut, we design our product to be market neutral and as liquid as possible. Your funds are lent out and protected from borrower default with overcollaterlization, while other high-APY crypto products use your funds as collateral for their own borrowing practices. In times like these, it’s Donut and our partners' margin calling loans and liquidating collateral from these types of rehypothecation products.
What diligence is performed on partners to ensure stability?
We conduct extensive diligence on lending partners and protocols before we add them. This includes understanding how lending services operate, risk management procedures, looking at the composition of borrowers and counterparty balance sheets. We engage in frequent dialogue to understand the health of loan loss reserves and current security measures. We plan to make more information on our perspectives of the lending ecosystem public soon.
How do your lenders vet borrowers?
Wyre, Genesis and Abra vet borrowers by assessing their financials and what they plan to borrow the capital for. A typical use case might be a crypto miner borrowing capital to mine more Bitcoin, or an institutional fund running a market neutral trading strategy. They will favor those who run lower risk strategies and have healthier balance sheets.
What risk management practices do borrowers have?
Borrowers use audits and diversification to manage risk. A typical metric is looking at the ratio of debt-to-equity.
Is Donut concerned about any of the stablecoins it uses depegging?
Is Donut paying specific attention to anything else in the market?
Our focus remains on making sure we bring to you the safest and most secure product. Our immediate focus is on a plan upgrade we plan to launch in the coming weeks - stay tuned!