Hodlnaut Judicial Managers Weigh Unwinding Crypto Lender's Assets Before Ethereum Merge

The Singapore-court-appointed managers of Hodlnaut, a crypto lender that froze withdrawals in August, said the forthcoming Ethereum upgrade known as the Merge poses a liquidation risk to the company's distressed assets and it is considering selling them to limit potential losses.

"There are several risks associated with the Merge, which could be detrimental to assets held on the Ethereum network (including DeFi platforms) if they were to materialize," said Aaron Loh Cheng Lee, one of the interim judicial managers, in a statement to creditors on Sept. 10. DeFi refers to decentralized finance, a term for software-controlled financial applications.

According to the statement, a particular risk of the Merge, which looks set to go ahead on Thursday, relates to so-called pricing oracles, which feed data to the smart contracts that govern DeFi protocols. The Merge may lead the oracles to "give out erroneous prices during the transition," leading smart contracts to automatically liquidate the company's assets.

Under the Merge, Ethereum will shift from a proof-of-work consensus algorithm to proof-of-stake one. If, as has been proposed, the blockchain splits, or forks, so that a proof-of-work version continues to operate, it's possible the oracles will source pricing data from the wrong system.

"One of the ways of mitigating such risks in advance of the Merge would be for Hodlnaut HK to unwind the Tokens deployed on the DeFi platforms, which may result in material losses," Loh Cheng Lee said. Hodlnaut HK is one of the Singapore entity's operating companies.

Hodlnaut was placed under interim judicial management, a form of creditor protection and debt restructuring, on Aug. 30, three weeks after it froze withdrawals citing "difficult market conditions." The company was one of several that crumbled under the pressure of this year's crypto market downturn. Rival lender Celsius Network eventually filed for bankruptcy as the prices of bitcoin (BTC) and ether (ETH) slumped by more than 70% in a six-month period.

The Algorand Foundation, which oversees the development of the Algorand blockchain, revealed today that it had $35 million in exposure to Hodlnaut.