Curriculum·J304 Lending, Borrowing, and Collateralized Leverage·about 32 min
Systemic risk
By the end of this lesson you can
- →Explain why a protocol accepting its own token as collateral is reflexive
- →Compute the moment at which defaulting becomes the borrower's rational choice
- →Enumerate the independent parties a single leveraged position depends on
- →Identify who absorbs bad debt, and what that means for a supplier
Junior · enrolled learners
This lesson opens with Venus Protocol, 18 May 2021.
- What happened
- Venus, a lending market on BNB Chain, accepted its own governance token XVS as collateral. On 18 May 2021 the XVS price round-tripped from about $76 to about $143 and back to $76, in a market whose depth was concentrated on a single venue. At the elevated price, borrowers drew very large loans against XVS collateral: reporting identified one position borrowing 4,200 BTC and another borrowing 13,400 ETH against XVS. When the price reverted, the debts exceeded the collateral's real value, and the borrowers did not repay. More than $200M of liquidations followed and the protocol was left with over $100M of bad debt. Venus stated that no attack on the protocol had occurred and attributed the price move to large market orders.
- The decision point
- The collateral was the protocol's own token, which makes the exposure circular in a way ordinary collateral is not. XVS's value depended on confidence in Venus, and Venus's solvency depended on the value of XVS, so the asset that was supposed to make the protocol whole was the asset that would be worth least in the state where the protocol needed it. Every risk parameter was set as though the collateral were an independent asset, and it was not.
- Recorded loss
- $100,000,000
What you will be able to answer
- →Why is a protocol's own token bad collateral?
- →When does defaulting become rational?
- →Who absorbs bad debt?
- →How many parties does a looped position depend on?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.theblock.co/post/105301/bsc-venus-protocol-liquidations-xvs-token-possible-price-manipulation
- https://thedefiant.io/bscs-venus-protocol-left-with-bad-debt-after-liquidations
- https://www.quadrigainitiative.com/casestudy/venusfinanceliquidityfailure.php
- https://governance.aave.com/t/staked-eth-and-aave-risk-june-11th-update/8469
Confidence high·Volatility medium·Reviewed 2026-08-06·Owner unassigned
Contested
Whether the XVS move was deliberate manipulation was disputed at the time and Venus stated that no attack on the protocol occurred. The lesson does not require it resolved: a collateral asset whose price can round-trip by nearly a hundred percent in a day produces the same bad debt either way, and that is a property of the depth rather than of anybody's intent.
Reported figures for the loans and the resulting bad debt vary between roughly $100M and $145M across sources, partly because the valuations depend on which price is used, which is itself the subject of the lesson.