DeFi lending protocol Inverse Finance, with more than $178 million in investor funds, has patched a $2.6 million bad debt hole in the project’s finances.
A bad debt happens when a loan position cannot be repaid because the collateral used to borrow funds has lost a lot of its value, which leaves the lender with a hole in their finances. It can happen due to malicious exploits that drain liquidity from lending pools or a massive market decline that causes the price of collateral tokens to plummet.
On Monday, Inverse Finance secured funds to service the bad debt by selling 104,000 of its native Inverse tokens to a cohort of DeFi investors. The token sale was for 25 Dola per Inverse token, to raise the $2.6 million required.
Dola is the protocol’s dollar-pegged stablecoin, while the Inverse token controls the protocol and absorbs financial risks. The latter is also the governance token for the DAO that controls the protocol.
Given the relationship between both tokens, the deal effectively means investors are betting that the Inverse token’s long-term growth potential can cover the bad debt liability, and the DAO proposal for the move did not hide this trade-off.
The Inverse tokens acquired by the investors will be locked for six months. Inverse tokens traded for more than $43 on Monday, a 72% premium on the cost basis of the DeFi investors.
The bad debt traces back to malicious exploits on Inverse Finance lending markets that have since been deprecated. Those defunct lending markets suffered two malicious exploits in April and June 2022 that resulted in more than $24 million in losses.
A portion of the bad debt also comes from Euler Finance’s $200 million flash loan attack of March 2023. Euler has since recovered the hack and now holds more than $1 billion in investor assets, a 10-fold growth in 2025.
‘A moral obligation’
Monday’s repayment whittles the protocol’s bad debt exposure to $3.4 million, which the DAO plans to cover by borrowing from 40acres.finance, another lending protocol.
Haridy said the protocol didn’t have a choice but to cover the bad debt.
“Dola would’ve collapsed due to the elevated bad debt levels back then and more people would lose their money,” Haridy said. “We had a moral obligation towards people who trusted Dola with their hard earned money and we chose to fulfill this obligation.”
The repayment also comes as the protocol reached $100 million in loans on its fixed-rate lending market platform FiRM, another sign of recovery for a protocol that has suffered multiple crises.
