What Lending Scheme Is WLFI Running on Dolomite Behind Sun Yuchen’s Outburst?

Author: Chaos Labs

Translated by TechFlow

You know things are serious when @justinsuntron starts leveling accusations.

Recent on-chain activity on @Dolomite_io shows a sharp surge in borrowing linked to @worldlibertyfi. Over the past few days, the team has held open positions on the protocol and significantly expanded its exposure—pushing WLFI collateral utilization close to its cap while triggering a steep rise in stablecoin borrowing.

Dolomite is an EVM-based lending protocol founded by @CoreyCaplan3, who also serves as CTO of World Liberty Fi. The protocol permits borrowing against WLFI collateral, with a liquidation threshold set at 66% of the collateral’s value. The current WLFI collateral cap stands at 5.1 billion tokens, now nearly fully occupied by the World Liberty Finance team across two primary addresses: one corresponding to the team’s multisig wallet (0x5be9…) and another to a secondary multisig wallet (0x44a6…).

Position Structure

Much of the discussion surrounding these positions has overlooked their underlying structure:

Wallet 0x44a6 pledges 3 billion WLFI (valued at approximately $242 million at time of writing) to borrow roughly $40.7 million in stablecoins—primarily USD1. This implies a liquidation threshold of roughly a 75% drop in the WLFI price.

Wallet 0x5be9 accounts for the bulk of total borrowing and features a more complex structure, holding two positions:

• Borrows $111 million USD1, collateralized by a mix of WLFI ($161 million) and USDC ($98 million);
• Borrows $89 million USDC, collateralized by $110 million USD1.

In effect, the USD1 borrowed in the first position is used as collateral for the second position to borrow USDC—and the borrowed USDC is then cycled back into the first position as additional collateral. The rationale behind this structure has not been publicly disclosed.

Under current configuration—and assuming USD1 remains pegged—the WLFI price would need to fall roughly 75% to trigger liquidation.

Possible Interpretations

Several interpretations have already emerged:

One interpretation suggests this move boosts USD1 and USDC utilization and rates on Dolomite, thereby incentivizing user participation. USD1 utilization has climbed to 83.4%; with Merkl WLFI rewards factored in, the supply rate reaches 10.64% (the Merkl campaign ends in three days). USDC utilization stands at 90.19%, with a supply rate of 9.07%. Borrowing rates for both assets have risen to ~5%, rendering most non-WLFI-related looping strategies unprofitable. Notably, Merkl rewards are calculated based on net borrowing volume, limiting how much reward this structure can extract from looping positions.

Other interpretations include liquidity needs, a preference for borrowing over selling or burning USD1, early positioning ahead of investor token unlocks, or preparation for exit under current risk parameters.

Market Impact

While medium-to-high LTV lending against governance tokens is not unprecedented (Dolomite itself offers similar parameters for assets like CRV), this particular setup warrants close attention:

1. The amount of WLFI used as collateral exceeds the total circulating supply of the token on Binance—the largest exchange—by over four times.

1. Although WLFI’s nominal market cap exceeds that of assets such as AAVE and CRV, its actual circulating supply and trading liquidity on centralized and decentralized exchanges remain far lower than those of such assets.
2. Only 20% of WLFI has been unlocked for investors so far; the remaining 80% awaits a governance decision expected in mid-April. As a result, the majority of supply is not yet participating in price discovery. Investors currently enjoy roughly 1.88x ROI; upon unlocking, many may choose to realize gains.

This situation is likely to evolve further once the unlock proposal is formally submitted.

Latest Developments

Following public scrutiny, the WLFI team has repaid approximately $10 million USD1 and stated it is willing to post additional collateral if needed. The multisig wallet 0x5be9 still holds an additional 1.02 billion WLFI tokens, which could be deployed as collateral should the collateral cap be raised; it also holds around $27 million USD1, available for further repayments.

World Liberty Finance accounts for 82.7% of Dolomite’s total supplied TVL and 85.3% of its total borrowed assets. In practice, activity is highly concentrated: the same entity provides the collateral driving borrowing, and liquidity largely cycles among the same set of addresses.

This situation remains fluid—stay tuned.