Next Steps: Withdrawing funds from M11 Credit's wETH lending pool on Maple Finance v2

Governance Discussions
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Since last week’s update, M11 Credit has provided an update on the Orthogonal Trading and Auros loans and Maple Finance has provided an update on their v2 launch.

M11 Credit Update

Auros Loans

The latest update from M11 Credit on the Auros loans was provided in a Twitter statement on 11 Dec, where they shared that all of Auros’ loans “will enter arrears on-chain and begin incurring penalty interest.”

M11 Credit stated that they believe they will “be able to recover a large majority of the assets for liquidity providers.”

At this time, the Auros situation is still fluid but it does appear that a high recovery is likely according to these recent statements.

Orthogonal Trading Loans

M11 Credit issued a statement on Twitter and Medium on 14 Dec, where they shared that all Orthogonal Trading loans were declared in default on-chain.

The total value of the defaults declared with liquidation of First Loss Capital were:


Source: M11 Credit Update on Orthogonal Trading Medium article

M11 Credit’s first loss capital and the Pool Cover was contributed to reduce the impact to borrowers, with 22,087.36 MPL tokens allocated for an airdrop to wETH lending pool LPs to offset losses.The airdrop will be processed before 23 December 2022.

M11 Credit also shared the information about the legal process to recover funds from Orthogonal Trading:

The legal process for recovery against Orthogonal Trading continues, and we have made significant progress this week. We will have a more material update on this process and the steps being taken by early next week.

You can read their full update for more information.

Maple Finance Update

Maple Finance launched the v2 of their protocol this week, which changed the functionality around withdrawals from individual lending pools. Subsequently, the mutual’s previous withdrawal that was initiated last week has been reset and a new withdrawal request will need to be created within Maple v2 to withdraw any available funds from the M11 Credit wETH lending pool.

Withdrawals are fairer in Maple v2 and prevents LP’s from withdrawing without taking the correct, proportional loss. When a borrower defaults, losses are passed on to the lenders in the pool and losses are shared pro rata among LPs. You can read more about the withdrawal process in Maple Finance’s v2 documentation.

If members decide to signal support for withdrawing all available capital from the wETH lending pool, the mutual will receive a prorated distribution of wETH given the partial liquidity in the pool due to the Orthogonal Trading defaults.

Factors to Consider

The situation is incredibly fluid and as new updates arise there is a need to act quickly. One example of this would be future defaults on loans that are presumed to be healthy. Another could be a meaningful change in the expected recovery rate on a defaulted or impaired loan.

Having members vote on each change slows down the process and is likely to lead to a worse outcome for the mutual and its members. Nexus Investment has contributed to this proposal, which offers members the choice to delegate the power to manage this situation to the DAO investment team.

We can only withdraw funds that are in the pool, which means waiting for loans to be paid back and for recoveries to be made. Currently, the amount of free funds in the pool is relatively small, which means that we will slowly withdraw funds over time. The length of the withdrawal increases the amount of potential decisions that could arise, making the complete process too complicated for a single member vote.

Current Position

To put members in the best position possible, we have restarted the withdrawal process in Maple V2. The withdrawal window will be open from Wednesday, 21 December, to Friday, 23 December. Assuming that a fair withdrawal rate is available–compared to the expected recovery–as much wETH as possible will be withdrawn. Nexus Mutual should expect to be able to withdraw between 900 and 1,000 wETH in this period. Then, be automatically rolled to the next withdrawal window.

If members decide to delegate Nexus Investment the power to manage withdrawing 100% of the funds from Maple over time, then the DAO investment team will manage the mutual’s exit from the M11 Credit wETH pool. If there is a strong understanding that withdrawing the funds more slowly will lead to a significantly greater recovery rate, this will be done. Otherwise, as long as it’s possible to remove funds from Maple at a fair recovery rate, given the loan defaults, this will be done as quickly as possible.

Decisions for Members to Discuss

Decision #1: Should the mutual continue to withdraw funds from the Maple/Maven 11 wETH pool with the aim to fully withdraw funds as they become available?

Decision #2: On the basis of a decision to fully withdraw, should the mutual delegate the process of withdrawing to the Nexus Investment team for execution, or should the mutual return to Snapshot votes for each individual decision?

  • Snapshot Signalling Vote | Timeline

After discussion has taken place, a Snapshot signalling vote will be used to gauge members’ sentiment on the potential voting options that result from this discussion.

Due to the constrained timeline, a Snapshot signalling vote willl take place next week, so members can signal their support for the best way forward while the withdrawal window is open between 21–23 December.

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I’d think we should continue fully withdrawing, but admittedly I’m not familiar with the current recovery rate nor the prospects for a better recovery rate further down the line. Maybe we could have more info provided on this front (or link to somewhere else if it has been discussed).

Last time a figure was mentioned, 2,461 ETH losses were expected for Orthogonal Trading loans. No figure had been given yet for Auros. Can we get an update here, are these still the latest and most accurate figures or have they been revised since?

Delegating to the investment team is the clear choice here. Though maybe a separate conversation should be held about whether the current members of the investment team members should remain, or if some should be rotated for new members in light of this incident?

Were the members initially supportive or opposed to depositing funds in Maple Finance?

Risk reward in recent weeks on Maple was arguably insufficient vs LSDs (pointed out by @vincentj back in August). As I understand it, there was a limited window for withdrawals due to a cooldown period after depositing.

Was there a period when withdrawals were possible at any stage since the funds had been deposited? Was the investment team aware of the r/r relative to LSDs., and did they consider taking any action to withdraw funds for safer alternatives?

No sense assigning blame here, but to the extent we have an investment team and we’ve suffered a pretty severe investment loss… That probably would call for a review and change in decision-makers in most orgs.

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Main factor here ends up being whether M11 impairs the Auros loans. In Maple V2, impairments are sort of like a temporary default. They mark the loans down to 0 and anyone leaving the pool during that time would take the haircut as if they are defaulted.

There is no functionality to impair less than this, it’s binary. And, given that not every pool has the same “sizing” of loans, to be fair the impairments would likely be all Auros loans to 0, or keep them all at 100% value (i.e. presume full recovery).

In the case where there is no impairment, the only haircut on leaving the pool is the Orthogonal default. This seems fair, and presuming 0 recovery there makes sense. So, in this situation is makes sense to pull as much funds as possible as loans are repaid.

In the scenario of Auros being marked to 0, the hit on leaving the pool becomes much more significant. This would mean taking a 55% haircut, getting only 45% of the funds back.

The expected recovery rate on Auros is not public, but it’s not 0. It’s significantly more, which is why in this scenario I’d be in favor of not removing funds. Ultimately, to get the entire amount out will require waiting for a resolution to Auros anyway, because you cannot remove funds that are not in the pool, clearly.

If we believe that the recovery rate is greater than what they are “offering” on exit, you can end up coming out ahead of where you expected, because any LPs leaving will take a larger hit, leaving excess funds on a larger recovery for those remaining.

Obvious risk here is that other loans, specifically to Flow Traders, default in the interim.

I was in favor of this investment, as you might imagine given that I posted the proposal.

I won’t speak for the entire investment hub, but we spoke about this for many months and everyone was happy to see the proposal be posted and get feedback from the community. We spoke to many key stakeholders, specifically large holders of NXM, this was discussed in Discord, on the forum and on community calls for a few months before the vote went live.

There was little if any negative sentiment. Broadly members seemed to be happy with this idea.

Regarding pulling out over the last couple of weeks, the initial situation was only the Auros missed payment. Which we were assured was due to liquidity. This does seem to be the case, which is why there is still a chance of a very high recovery rate on those loans.

At that point, removing funds was not particularly helpful. Firstly, doing so would limit Auros ability to work through the situation and come to agreements with lenders for restructuring to aim for full recovery. This is particularly true as Maple is transparent and so private lenders could infer from this withdrawal.

Secondly is more pragmatic which is that you can only remove funds that are available and at that time the vast majority of funds were still locked in outstanding loans, as is the case today. As a result, withdrawing would only get access to a relatively small percentage of the funds in Maple.

Thirdly, once the loan went into the grace period (which is supposed to be 5-days) we could have started the 10-day timer to withdraw. But, if the loan did then default all withdrawal timers would be nullified. So, once we knew about Auros if we did start the timer immediately it wouldn’t matter in the case of a default, since the timer would be nullified prior to the 10-days. If they didn’t default, then a good resolution was reached and there would be no immediate emergency. In which case, it would be up to the members to do a full vote to decide if the R/R has changed enough to withdraw funds.

Roughly, that’s why the timer wasn’t started at that time. Then, the Orthogonal situation occurred, compounding the issue and sparking fear of more contagion. Hence, the timer was started then.

Hopefully that gives some clarity there.

Regarding liquid staking derivatives as an alternative, there is a couple options outside of Lido which at this point we are limited on by risk limits. RocketPool and StakeWise being the big two. Integrating technically with them is challenging and we’ve been working on this for a very long time, but there was no good solution here. StakeWise team has been much more receptive to helping, but then they decided to change their model, meaning we need to wait until they launch their new version before doing further development work.

As you can see, there’s no many good solutions here, which is why Maple was seen as a reasonable way to get some yield while staying long ETH (as the members have asked for). I agree, LSD exposure is a better R/R, but achieving this with the constraints of the Nexus smart contracts and safety needs is not easy. Enzyme allowed us to invest into Maple, which is why that option was available.

More broadly, if others would like to nominate themselves to lead or join the investment hub, they are welcome.

Ultimately here the decision makers were the members, they voted on this proposal. The caveat here is that the vote didn’t reach quorum and so was ratified by the board, but given the 99% approval rating and extremely low negative feedback on this over months, the distinction is somewhat irrelevant. Generally, think it’s fair to say that this was something members wanted and so it’s hard to point blame, though I do agree that there’s more we can learn from this situation.

Will add also that the investment hub acts primarily as a research team. It doesn’t exist to make investments, because members would need to vote on that. In this case, investment hub was consulted and necessarily involved to make quick decisions since a member vote was not feasible. But day-to-day, the investment hub is there to do research and share that in the form of proposals that members have the say on.

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The information included in the update is the latest information that is available. The Nexus Mutual Enzyme vault uses Chainlink Proof of Reserve to calculate the assets in the M11 Credit wETH pool. Now that the wETH lending pool has been updated to reflect that all Orthogonal Trading loans have defaulted, the vault’s NAV is now shown as 13,120.881 WETH. Based on the original deposit + interest accrued, this represents a 1.56% loss to the capital pool according to my calculations.

The current DAO teams are due to post renewal proposals in January. The last proposal was put up for review in July 2022 and was voted and approved by members in August. You can read those past proposals on the forum:

You can always raise that issue in a separate forum post, if you’d like.

While @vincentj did make this point, he shared his comment on 22 August, which was 11 days after the vote ended and 7 days after the funds were deployed on Maple in the wETH lending pool. During the 3-month review period, the members who shared comments largely expressed support with @DeFi_Dad asking questions on 10 August after the vote had transitioned to an on-chain vote, which was open from 8 August to 11 August.

On potential to withdraw–there is a 90-day lockup period for deposits to M11 Credit’s wETH lending pool, which was highlighted in the original proposal. Once the lockup period ended, the withdrawal request would have had to be submitted, which starts a 10-day cool-down process. The earliest any available funds could have been withdrawn would have been 24-25 November. However, the M11 Credit team didn’t share any concerns about borrowers in the wETH pool until after that time, with the first announcement occurring on 30 Nov and the Orthogonal Trading issues weren’t shared until the following week.

Not all funds could have been withdrawn in any event, as the mutual can only withdraw the wETH that is free in the pool and isn’t lent out to borrowers.

While the mutual initiated a withdrawal request to withdraw any available capital in the pool last week, the migration to Maple v2 reset that withdraw request timer, as noted above.

On risks–yes, the risks were highlighted in the original forum proposal with links to supporting resources that highlighted the risks regarding lending to Maple.

You can verify this information by checking the relevant posts on the forum and reviewing the Enzyme vault, as well.

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Great points!! Tend to agree that we should follow expected value, and if the loss is bigger withdrawing early we should rather wait… mid-term i’d def agree withdrawing once it makes full sense

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I absolutely believe that to the extent funds can be withdrawn from Maple Finance that wETH should be applied to be withdrawn.

Recovery rate for Orthogonal is 20% of the Loans (not good), Auros is reported to be better, but with no transparency, its difficult to tell of the extent.

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The nuance here is that we crystallise losses to the extent that the loans are marked to 0 or not in the maple system. This is a binary decision on each loan and is outside our control.

eg if there is an expected recover of 20%, and the loan is marked to 0 then we take losses at a recovery rate of zero. In this circumstance it would be beneficial to stay in slightly longer if we genuinely believe 20% is the expected recovery rate.

Overall my views are we should unwind the investment in full over a reasonable time frame but because of the variability in the ongoing situation (on many different elements) we should delegate to the investment hub to implement the best path.

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We should ask to create a debt-recovery token for both Auros and Orthogonal - and propose it on their DAO.

Thus we can simply participate in the recovery of those.

It would be despicable to Maple/Maven11 to mark these to zero.

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Signalling vote: Next steps for the M11 Credit wETH pool deposit on Maple Finance

This proposal has been transitioned to a Snapshot signalling vote to determine how members would like to move forward with the M11 Credit wETH lending pool deposit on Maple Finance.

Due to the constrained timeline, this Snapshot signalling vote is taking place after several days of discussion, so members can signal their support for the best way forward ahead of the withdrawal window, which is open between 21–23 December.

Based on the discussion to date, the choices for the vote are:

  • Option #1: Do not withdraw
  • Option #2: Withdraw and delegate withdrawal process to DAO investment team
  • Option #3: Withdraw and return to Snapshot votes for each individual decision

You can vote to signal your support for one of the three options presented above.

Vote → Signalling vote: Next steps for the M11 Credit wETH pool deposit on Maple Finance

Voting on the Snapshot signalling proposal will be open from 19 December at 10:15am EST / 2:15pm UTC until 21 December at 10:15am EST / 2:15pm UTC.

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Update here.

Maven 11 have marked the Auros loans to zero in the Maple system. That means any capital withdrawing will crystallise losses at 0%. The expected recovery is a lot higher, in the 60-100% range. As a recovery token won’t be created for Auros, Nexus Mutual’s only way of accessing our share of the recovery is to stay in the Maple pool.

https://twitter.com/M11Credit/status/1605240240544915457

So while not part of this vote specifically, I would recommend Nexus don’t withdraw any capital in the upcoming withdrawal window.

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It would seem that Nexus would need to wait for recovery of Auros and Orthogonal to proceed with withdrawal.

In the meantime, I think as a lender being screwed out of liquidity that comes free - that Nexus should campaign to receive freed up wETH as it comes free and recovery tokens that represent the exposure to the defaulted loans.

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Assuming the current snapshot vote results in members deciding to withdraw, the investment committee will coordinate with M11 and Maple and let them know of our members intentions. The goal would be working out the best way to get enough liquidity.

Hard to get into any more specifics at this stage.

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This Snapshot vote has closed, and members voted with 244k NXM (99.93%) for Option #2: Withdraw and delegate withdrawal process to DAO investment team.

Per the choices outlined in the Snapshot vote and the proposal, members have signalled that they would like to withdraw assets from the M11 Credit wETH lending pool on Maple and want to delegate the withdrawal process to the DAO investment team.

The DAO investment team will manage the mutual’s exit from the M11 Credit wETH pool and act to achieve the highest recovery rate possible for members.

For more information, you can review the Snapshot vote

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