Trump-backed World Liberty Financial has faced scrutiny over its borrowing and use of governance tokens as collateral. Although the team rejected these claims a few days ago, as AMBCrypto reported earlier, the on-chain data has become even clearer.
Chaos Labs reported that World Liberty Financial (WLFI) quickly expanded its borrowing on Dolomite, pushing collateral usage close to its cap of 5.1 billion across two multisigs.
How extensive is WLFI’s leverage?
According to Chaos Labs, one wallet borrowed $40.7 million in stablecoins, mostly USDI, compared to $3 billion in WLFI tokens.
These tokens were valued at approximately $242 million, suggesting a liquidation threshold corresponding to a 75% drop in the price of WLFI.
The second wallet contains $111 million in USDI, borrowed against a maximum of $161 million in World Liberty Financial (WLFI) and $98 million in USDC. Additionally, the wallet contains $89 million in borrowed USDC versus $110 million in USDC.
This implies that one USDC debt is already being used as collateral to incur another USDC debt. This leaves the borrowed funds in a collateral loop.
Chaos Labs suggested that the most likely interpretation of borrowing is the need to increase the use of USDI and USDC.
In fact, USDI usage reached 83.4% with funding rates at 10.64%, including WLFI rewards through Merkl. USDC usage reached 90.19%, with a supply rate of 9.07%.
As a result, borrowing rates for both assets have moved into the 5% range, pushing non-WLFI strategies into the negative zone.
How is the market reacting?
In this context of increasing chaos, investors panicked in the market and liquidated their positions.
Futures data showed $479.89 million in outflows versus $438.46 million in inflows. This pushed the Futures Netflow to -$41.4 million, signaling sustained selling pressure.
On the spot side, net flows remained positive for five consecutive days, totaling $5.7 million in outflows.
This alignment showed that the derivatives and spot markets were bearish.
This selling pressure has considerably weakened the market. In fact, WLFI fell to $0.079 at press time, representing a 20% decline on the weekly charts.
This market weakness was further confirmed by the Relative Strength Index (RSI). The altcoin’s RSI fell to 28, entering oversold territory and signaling intense pressure.
At the same time, the ADR fell below 1 to 0.9, confirming the strength of the trend. When the RSI and ADR fall to these levels, it suggests the likelihood of a continuation of the trend.
Additionally, governance concerns have added to the uncertainty.
Justin Sun recently raised allegations regarding WLFI’s contract design and control mechanisms. This context weakened sentiment as risks linked to debt intensified.
If the pressure persists, WLFI could test the $0.07 support level. A recovery above $0.1 would be necessary to mitigate the bearish momentum.
Until then, high debt and collateral recycling could continue to weigh on price stability.
Final summary
- WLFI’s borrowing pushed collateral usage close to its $5.1 billion cap, leaving little room for additional leverage.
- A recycling loop formed in which borrowed USDC was reused as collateral, increasing systemic risk without adding new liquidity.
