XRP Lending Model Exposed: Single-Loan Structure Leaves Depositors Vulnerable
XRP's lending model has been criticized for leaving depositors exposed to significant losses in the event of default. A recent comparison between two loan books with identical settings and reserves showed that a single-loan structure can result in a 20-fold increase in losses compared to a multi-loan structure.
The study, which used hypothetical figures, found that when a single loan defaults, 90% of the loss is borne by depositors, whereas if the same debt is divided into ten smaller loans, only 4.5% of the loss reaches depositors.
This discrepancy arises from the way the reserve is allocated in each scenario. In the single-loan structure, the entire reserve is tied up in a single loan, leaving little to absorb losses when it defaults. In contrast, the multi-loan structure allows for more flexibility and better diversification of risk, reducing the impact on depositors.
The results of this study have implications for prospective lenders who need to assess the protection offered by XRP's lending model. They must consider factors such as loan size, payout settings, and contractual support to determine the level of risk involved.