TL;DR
- World Liberty Financial (WLFI), linked to the Trump family, has borrowed around $75 million in stablecoins with its own WLFI tokens as collateral
- The lending occurs through the DeFi protocol Dolomite, where a WLFI co-founder holds a leading position
- Experts compare the structure to the circular lending practices that contributed to the FTX collapse in 2022
- The WLFI token has fallen between 10 and 20 percent after the details became known
Project Borrowed Millions Against Its Own Tokens
World Liberty Financial (WLFI), a crypto project with close ties to the Trump family, finds itself in hot water after details of the project's lending practices were exposed in blockchain information analyzed by, among others, Chaos Labs. According to sources, WLFI has borrowed a total of approximately $75 million in stablecoins through the decentralized lending protocol Dolomite – including $65.4 million in the project's own USD1 stablecoin and $10.3 million in USDC.
As collateral for these loans, the project is said to have pledged around 5 billion of its own WLFI governance tokens. According to Chaos Labs, a single wallet borrowed $40.7 million against 3 billion WLFI tokens, valued at approximately $242 million – which sets a liquidation threshold at a 75 percent price drop.
Conflict of Interest in Lending Protocol
A further complication is that Corey Caplan, co-founder of Dolomite, also holds a central role in World Liberty Financial, according to Cointelegraph. This raises questions about conflicts of interest in a situation where WLFI tokens now constitute between 55 and 82.7 percent of Dolomite's total value locked (TVL), and 85.3 percent of the platform's total borrowing volume.
The high concentration has pushed the USD1 pool's utilization rate up to around 93 percent, making it difficult for ordinary depositors to withdraw their funds.
"Dumping on Retail Investors"
Reactions from the crypto community have been sharp. Austin Campbell, adjunct professor at NYU Stern School of Business and recognized stablecoin expert, characterized the arrangement to Cointelegraph as the "WLFI team effectively dumping on retail investors." DeFi analyst Ethan warned on X about the structure introducing systemic risk, pointing out that if the value of the WLFI collateral approaches the liquidation threshold, it would be almost impossible to liquidate it without significant losses for lenders.
Furthermore, over $40 million of the borrowed stablecoins are said to have been transferred to Coinbase Prime, a platform typically used for institutional OTC conversions – which critics interpret as an indication that the funds have left the protocol.
"If the WLFI collateral approaches liquidation, it is practically illiquidable without major losses for lenders" — DeFi analyst Ethan, quoted by Cointelegraph
Justin Sun Turns His Back
Among the more dramatic reactions is the statement from billionaire Justin Sun, who previously invested tens of millions of dollars in WLFI. According to Cointelegraph, Sun accused the project of having built-in hidden mechanisms that allow insiders to freeze token holders' funds, describing the project as "a trap disguised as a door."
It has not yet been independently verified whether the alleged freezing mechanisms actually exist or are implemented in the way Sun describes.
WLFI Rejects Criticism
World Liberty Financial, for its part, dismisses the accusations as "FUD" – fear, uncertainty, and doubt. The project claims to operate as an "anchor borrower" to generate higher returns for lenders, and emphasizes that they are "far from liquidation." Should the price of the WLFI token fall further, the project states that they will provide more WLFI as additional collateral – a response critics find little reassuring given the token's limited market depth.
WLFI further reports having repaid $25 million of the loan, with two separate repayments of $15 million and $10 million respectively.
Token Plunges Amid Criticism
After the information became known, the WLFI token has fallen to record low levels. Various reports estimate the decline to be between 10 and 20 percent, which has wiped out a significant amount of market value. Comparisons to the Terra/LUNA collapse in 2022 – where circular token usage contributed to a catastrophic crash – now dominate the debate surrounding the project.
It remains to be seen whether WLFI's own assurances of solidity hold up if the crypto market continues to fall in an already risky macro environment.
