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 software upgrade on the Ethereum blockchain 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," Aaron Loh Cheng Lee, one of the interim judicial managers, said in a statement to creditors on Saturday. DeFi refers to decentralized finance, a term for software-controlled financial applications.

According to the statement, a particular risk of the Merge, which is set to take place 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 to a proof-of-stake method of maintaining its network from a proof-of-work one. If 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 because of "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) sank by more than 70% in six months.

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