World Liberty Financial (WLFI), a Trump-backed entity, is currently embroiled in controversy, facing intense scrutiny over its aggressive borrowing strategies and the use of its governance token as collateral. Despite earlier dismissals by the team, recent on-chain data paints a stark picture of financial instability and heightened risk, raising alarms across the crypto market.
Alarming Leverage and Collateral Recycling
On-chain analytics firm Chaos Labs has exposed WLFI's rapid expansion of borrowing on the Dolomite platform, pushing its collateral utilization dangerously close to its $5.1 billion cap across two multisig wallets. A particularly concerning finding reveals that one wallet borrowed $40.7 million in stablecoins against 3 billion WLFI tokens, valued at $242 million, indicating a severe liquidation risk should WLFI's price drop by 75%. Even more critically, an alarming "loop of collateral" has been identified, where borrowed USDC is immediately re-used as collateral for new debt. This mechanism artificially inflates liquidity and systemic risk without injecting fresh capital, leading to surging utilization rates for USDI (83.4%) and USDC (90.19%) and subsequently higher borrow rates.
Market Panic and Price Plunge
The revelations of WLFI's precarious leverage have triggered widespread panic among investors, resulting in significant market exits. Futures data registered a net outflow of $41.4 million, signaling strong bearish sentiment, which was mirrored by negative spot netflows. This intense selling pressure has severely impacted WLFI's market value, with the token plummeting by 20% weekly to $0.079. Technical indicators like the Relative Strength Index (RSI) dropping to 28 confirm oversold conditions, while a decline in ADR further validates the bearish trend's strength. Compounding these financial concerns, allegations regarding WLFI's contract design and control mechanisms by figures like Justin Sun have added further uncertainty, keeping market sentiment fragile as leverage risks continue to escalate. The ongoing risks of elevated leverage and recycled collateral pose a persistent threat to WLFI's price stability, with the token potentially testing a critical $0.07 support level.
