New analysis highlights a critical difference in how the XRP Ledger (XRPL) lending design handles defaults, revealing that the size of a defaulted loan can dramatically alter investor losses. According to data modeled by CryptoSlate, a single large loan defaulting can lead to 20 times more loss for vault depositors compared to the same total amount of bad debt spread across multiple smaller loans.
How XRPL Lending Defaults Impact Depositors
The discrepancy arises from the XRPL’s documented lending rules, which apply a separate cover calculation for each default. The system pools assets in a vault and extends uncollateralized loans through a broker. Depositors hold shares in this vault, and their value falls when loans default.
Using a hypothetical scenario, CryptoSlate modeled two loan books each starting with 1 million tokens of debt and a 200,000-token reserve, alongside identical protection settings. In both cases, 100,000 tokens of debt defaulted. When this bad debt came from a single 100,000-token loan, the vault suffered a 90,000-token loss. However, when the same 100,000 tokens of bad debt were spread across ten smaller 10,000-token loans, the vault loss was only 4,500 tokens.
This significant 20-fold difference is driven by how the reserve is released. The protection mechanism is governed by three fields: ‘CoverAvailable’ (the actual deposited reserve), ‘CoverRateMinimum’ (minimum cover the broker must maintain), and ‘CoverRateLiquidation’ (how much of that minimum cover can be used per default). In the base example, with both the minimum cover rate and liquidation rate set at 10%, each default is capped at 10,000 tokens (1,000,000 tokens debt 10% minimum 10% liquidation).
For the single large loan, only 10,000 tokens of cover were paid, leaving 90,000 tokens as vault loss. For the ten smaller loans, each received a payout, with the total cover reaching 95,500 tokens and vault losses totaling just 4,500 tokens. This occurred even though the broker began with enough reserve to absorb the entire default amount, highlighting that the per-default cap is the limiting factor.
What This Means for Prospective Lenders
Prospective lenders need to understand not just the total available reserve, but also the distribution of loan sizes and the specific cover rates. The `LendingProtocolV1_1` code, announced on August 6, serves as the basis for this analysis, though mainnet activation was unconfirmed as of September 6. The cover rates, once set at broker creation, are fixed and cannot be changed later, although the available reserve can be topped up.
Adding more cash to the reserve alone does not change payouts if the per-default cap is already limiting the cover. Therefore, to truly assess protection, investors need full transparency on cover rates, available reserve, current debt, individual loan sizes, and borrower concentration.
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