XRP Ledger Lending Model Exposed: 20-Fold Gap in Loss Allocation

A recent analysis of XRP Ledger's lending model revealed a significant discrepancy in how losses are allocated to depositors when a loan defaults. The study compared two different structures of debt, one with a single large loan and the other with ten smaller loans. In both cases, the total amount of bad debt was the same at 100,000 tokens.

However, the analysis showed that the value backing depositors' shares in the vault fell by 90,000 tokens when the single loan defaulted, compared to just 4,500 tokens when the same debt was spread across ten smaller loans. This 20-fold gap is attributed to how the reserve is released in the event of a default.

The XRP Ledger's lending design pools assets in a vault and extends fixed-term, uncollateralized loans through a broker responsible for underwriting. Depositors hold shares in the vault, whose value falls when the assets backing them suffer losses. The study used a comparison model that immediate write-down using documented rules and matching 3.3.0 release code, announced August 6.

Prospective lenders need to consider the loan sizes and payout settings behind a reserve to judge its protection. The analysis highlighted the importance of understanding how the XRP Ledger's lending mechanism works and how it affects depositors in the event of a default.