Bad Debt Probability Model

Credit & Lending

Moderate

Quantitative Risk

Confidence Score

76%

Last updated 16 days ago

Current Thesis

Bad debt emerges when liquidation fails AND price moves against the position. With Arch's 98.2% liquidation reliability, bad debt probability drops to <0.8% annually for 5x leverage at 75% LTV. At 3x leverage + 60% LTV, bad debt is effectively zero.

Evolution of Belief

Oct 1, 2025

Bad debt probability is 2-5% annually for standard DeFi leverage products.

Reason: Industry benchmark analysis

Jan 30, 2026

With better liquidation, bad debt can be reduced to <1% if LTV ratios are conservative.

Reason: Monte Carlo simulations on Arch's liquidation reliability

Key Data Inputs

Bad Debt Rate (3x, 60% LTV)

Annual bad debt probability

0.01%

Trend: Down

Bad Debt Rate (5x, 75% LTV)

Annual bad debt probability at higher risk

0.78%

Trend: Stable

Liquidation Failure Cost (avg)

Avg $ loss per liquidation failure

$12,400

Trend: Down

Linked Research Nodes

depends on

Liquidation Reliability Index

Open Questions

•How does bad debt probability change under extreme price volatility (>30% daily moves)?
•What's the relationship between bad debt rate and protocol revenue?

Downstream Decisions

Product

High Impact

Can offer 5x leverage product with reserves covering only 1-2% bad debt

Strategy

High Impact

Position lending product as safer than peers; appeals to institutional risk-averse LPs

Change Log

16 days ago

Updated model with enhanced Monte Carlo scenarios

Quantitative Risk Analyst