World Liberty Financial co-founder Zak Folkman publicly defended his project's $75.7 million loan from the Dolomite lending protocol on May 14, describing it as a "very small loan" taken to "jumpstart Dolomite."

The comments came as WLFI, the Trump family-affiliated crypto venture, faces simultaneous scrutiny over its DeFi borrowing practices and an escalating legal dispute with TRON blockchain founder Justin Sun.

The borrowing arrangement began in February 2026, months after WLFI and Dolomite publicly announced the World Liberty Markets partnership on January 12, 2026. World Liberty Markets is a dedicated lending application built on Dolomite's infrastructure. The arrangement drew widespread attention after CoinDesk published a detailed report on April 9. Under the arrangement, WLFI pledged roughly 5 billion of its own governance tokens at a nominal value of $440 million as collateral to borrow $65.4 million in USD1 stablecoins and $10.3 million in USDC from Dolomite.

The borrowing pushed the USD1 lending pool on Dolomite to approximately 93% utilization, a level that restricted retail depositors from making full withdrawals.

WLFI has since repaid $25 million of the balance in two tranches ($15 million on April 9 and $10 million on April 11), but a substantial portion remained outstanding as of early May 2026.

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The structural arrangement drew immediate criticism. Dolomite co-founder Corey Caplan serves as an active adviser to WLFI, meaning the largest borrower on the protocol and one of its builders share a direct professional relationship that has been in place since at least the January 2026 World Liberty Markets launch.

Critics drew comparisons to the lending relationship between FTX and its affiliated trading arm Alameda Research, whose circular financial arrangements contributed to the collapse of both entities in 2022.

WLFI's collateral position represents roughly 55% of Dolomite's total value locked, which stood at $163 million across seven blockchains as of publication, according to DeFi data aggregator DefiLlama. The protocol carries $283 million in active loans and generates approximately $18.49 million in annualized fees.

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WLFI defended its position as that of an "anchor borrower that generates yield for others and can avoid liquidation by posting more WLFI."

That argument has drawn skepticism in part because $65.4 million of the borrowing was in USD1, a stablecoin issued by WLFI itself, while the collateral consists entirely of WLFI's own governance tokens. This creates a self-referential risk loop with no independent price anchor on the USD1 side of the trade. The remaining $10.3 million was borrowed in USDC, a stablecoin issued by Circle and independent of the WLFI ecosystem, which does not carry the same concern.

WLFI's governance token fell roughly 12% to record lows in the days following the April media coverage of the loan.

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The controversy intersects with a separate and rapidly intensifying legal battle. On May 4, WLFI filed a defamation lawsuit against Sun in Miami-Dade County, Florida, after Sun filed a federal fraud complaint in California in late April alleging WLFI illegally froze his WLFI token holdings, once valued at approximately $1 billion.

WLFI alleges Sun used third parties to acquire tokens in violation of platform terms, bet against the WLFI token through short-selling, and moved $300 million from Sun-affiliated wallets to Binance.

Folkman called the defamation case "cut and dry" [sic].

Sun dismissed the Florida lawsuit as "a meritless PR stunt" and said he looks forward to defeating it in court. Sun had earlier accused WLFI of treating users as a "personal ATM," a characterization he made in April that bears directly on the loan controversy.

All allegations remain unproven, and both cases are in early stages.

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The practical fallout reaches well beyond the two parties in court. Pakistan signed a memorandum of understanding with SC Financial Technologies, a WLFI-affiliated entity, in January 2026 to explore integrating USD1 into the country's cross-border payment infrastructure.

Pakistan processes more than $30 billion in annual remittance inflows, and regulators framed the agreement as exploratory rather than an endorsement.

Neither the State Bank of Pakistan nor the Securities and Exchange Commission of Pakistan has issued a public statement in response to the Dolomite loan controversy. Observers note that the governance questions raised by the loan arrangement are unlikely to accelerate regulatory confidence in Islamabad.

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The impact extends further across Sub-Saharan Africa, where stablecoins accounted for 43% of the more than $200 billion in on-chain value moved between mid-2024 and mid-2025.

Nigeria leads regional activity, followed by South Africa, Kenya, Uganda, and Ethiopia.

USD1 launched in March 2025 and reached $4.6 billion in total circulation by April 2026, growth driven in part by a $2 billion investment deal involving MGX and Binance announced in May 2025. The stablecoin was accessible to African DeFi users through Dolomite, which advertised yields above 8% annually at launch.

Any retail depositor in Lagos or Nairobi who parked funds in the USD1 pool before the 93% utilization spike would have faced the same withdrawal constraints as institutional users, with far fewer alternatives available.

Traditional remittance corridors into Sub-Saharan Africa still cost an average of 8.78% per transaction, which is part of what draws users to stablecoin rails in the first place.

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WLFI has proposed unlocking an additional 62 billion governance tokens, a move that raises questions about the future value of the collateral underpinning its Dolomite position.

With its defamation case in Florida, a fraud defense to mount in California, and a stablecoin ecosystem under scrutiny across multiple emerging markets, the project faces a crowded legal and operational calendar in the months ahead.

Whether USD1's rapid growth can continue to outpace the reputational pressure will likely depend on how quickly WLFI resolves its remaining Dolomite exposure.