What led Vauld to the verge of the endgame?

“This is due to a combination of circumstances such as the volatile market conditions, the financial difficulties of our key business partners inevitably affecting us, and the current market climate,” said chief executive officer (CEO) Darshan Bathija in a statement on the company’s website.

There are a number of questions among investors, like: What went wrong with Vauld? What can investors do now? Is it the end of the road for investors? Let us try to find the answers for all the questions.

What happened?

Incorporated in 2018, Vauld is a crypto lending platform, which encourages long-term investing by offering SIP options and higher interest on crypto holdings to its users. More than 275 coins are listed on its platform.

In July 2021, the company received a funding of $25 million Series A from companies like Valar Ventures, Pantera Capital, CMT Digital, Gumi Cryptos, Coinbase Ventures, Robert Leshner, Cadenza Capital, and others.

It used these funds to grow its asset under management (AUM) by 10x and user base by 40x. The company also expanded its team to 200 members from 40 earlier.

Majority of the Vauld users were Indian, who accounted for 20 per cent of the AUM & contributed $10-15 million daily volume on the platform. However, the company claimed that the majority of its users hailed from the US.

The company earned very little or no brokerage income but instead generated large sums of interest income by lending crypto to other projects for arbitrage. This is as good as banks lending money to others.

However, it could not save itself from macroeconomic downtrends including the crypto winter, Luna collapse, Celcius sage and bankruptcy of Three Arrows Capital. This led to panic among the users, who started to withdraw their funds from various exchanges.

In an earlier attempt for survival, the company laid off 30 per cent of its staff in June, slashed its marketing budget and trimmed its executive compensation. Though, nothing could come to save a day for Vauld.

Ultimately, new tax rules and overall pessimism in the crypto market were a final nail in the coffin for Vauld, which saw liquidation worth more than $200 million in less than a month.

What went wrong?

Crypto lending platforms, like Vauld, heavily depend upon ‘yield farming’ which is typically arbitrage. Such institutions lend the crypto from users and arbitrage between cash and the

.

The value of a particular crypto token in India against another country on another exchange is quite significant and such platforms attempted to be benefitted from the same. This was attempted to generate higher yield on the tokens lent.

As the selloff in the crypto market triggered, the arbitrage or the so-called yield farming opportunities slumped drastically. Not just the tokens crashed, even the margin calls were triggered, adding more to the selling pressure.

Kirtan A Shah, Founder, Credence Wealth Advisors said that yield farming has become a difficult task globally.

“Crypto as an asset has nose-dived drastically and a lot of money is chasing yield farming, turning it into a herculean task in the current scenario,” he added.

The road ahead

London-based crypto lending firm, Nexo, is set to acquire fellow lender and crypto exchange Vauld and has signed a term sheet for buying 100 per cent stake in the latter one.

Nexo aims to use the acquisition to accelerate its presence in Asia. Vauld has 60 days of exclusive talks to explore an all-equity acquisition of the company.

Even Nexo itself has an debt obligation of close to $5 billion, but it has 100 per cent liquidity to meet it, according to US-based audit firm Armanino, clearing the clouds over its liquidity crisis.

However, Vauld is not the sole crypto lender in financial doldrums. Another Crypto lender Voyager Digital filed for bankruptcy, becoming the second high-profile crypto firm to do so in recent days.

What is there for investors?

Market experts gave the acquisition by Nexo a thumbs up, seeing it as a relief for the investors. However, such processes consume enough time, requiring thorough due diligence and current financial status of the company.

Market experts suggest that investors with big sums in crypto should not keep all the eggs in one basket. It is more prudent to keep the bigger assets in cold wallets.

Investors must remember that FTX, which recently acquired BlockFi, refused to bail out Celsius because Celsius’s books had glaring inconsistencies.

Sharat Chandra, VP- Research & Strategy, EarthID said that the acquisition of Vauld by Nexo should comfort investors but will have to wait until the acquisition process is complete and normalcy returns to the platform.

Vauld’s fiasco also brings forward the pressing issue of investor protection. In the absence of crypto regulation, crypto investors have no regulatory recourse, he added.