CEFI

Nexo reveals its business model, advocating for active management of user assets, engaging in brick-and-mortar businesses, hedging, and arbitrage.

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Nexo reveals its business model, advocating for active management of user assets, engaging in brick-and-mortar businesses, hedging, and arbitrage.

Celsius and BlockFi have declared bankruptcy one after another, leaving only Nexo as the lending platform targeting retail investors in the market. On 11/29, they specifically wrote an article to clarify their business model and how it differs from other bankrupt platforms. Although they continuously mention risk control strategies, they also directly admit that they are indeed using retail investors' funds for arbitrage as a hedge fund.

Core Business: Lending

Lending

Nexo earns the difference, or profit, between the interest payable by users for borrowing assets and the interest payable by Nexo to income product users. For example:

  1. A wants to earn 4-8% APY on $130,000 in stablecoins.

  2. B wants to buy a Tesla, so B collateralizes $260,000 in BTC and borrows $130,000 from A.

  3. B transfers the BTC to Nexo, Nexo transfers A's stablecoins to B, and B pays 13.9% APR to Nexo.

Margin Lending

Nexo points out that the spot, futures, and options trading provided by Nexo Pro and Nexo Prime are products that naturally stem from lending services. Margin lending works as follows:

  • A has $100,000 in Nexo Pro and wants to leverage 3x to go long on BTC.

  • B has $300,000 USDC and wants to earn interest.

  • B lends $300,000 USDC to A, and Nexo charges a fee for this service.

Nexo emphasizes that its collateral liquidation engine has experienced multiple periods of high volatility since 2018 without leaving any bad debt. Similar to protocols like Aave and Maker, if the collateral's value falls below 120% of the borrowed amount, the collateral will be automatically liquidated across multiple exchanges.

Additional Revenue Streams for Nexo

This has sparked criticism within the community. Nexo argues that a platform holding a large amount of users' idle assets in cold wallets is unproductive, leading to weak business performance. They aim to create value for users by actively operating custodied assets.

Nexo Trading Activities: Arbitrage

Nexo states that its trading activities aggregate liquidity from dozens of exchanges, allowing users to obtain better quotes, and Nexo profits from the spread and trading fees. Nexo also engages in arbitrage with user funds:

  1. Funding rate arbitrage: Opening long or short positions on two different platforms to earn high funding rates over a specific period.

  2. Arbitrage: Buying and selling the same asset on two platforms simultaneously to profit from the price difference.

  3. Pledges, neutral trading strategies.

Nexo Risk Management

Nexo particularly emphasizes the following:

  1. Ability to withstand a bank run.

  2. Refusal to provide uncollateralized loans to institutions.

  3. Nexo Token: Holding less than 10%, never used for collateralized loans.

  4. No exposed positions to FTX/Alameda, BlockFi, Genesis, Celsius, or bankrupt mining companies.

Community Comments

Compound founder Robert Leshner bluntly stated that Nexo is essentially a hedge fund operating with user funds.

Hasu, the strategy lead at Flashbots, also responded, pointing out that the issue lies in the fact that apart from trading, it's not possible to offer users such high rates.

Unlike Celsius and BlockFi, Nexo openly admits to actively managing custodied crypto assets to generate profits for users, rather than repeatedly emphasizing that customer funds have not been utilized before bankruptcy. According to their terms of use and earnings product terms, users on the Nexo platform and its earnings products bear full risk, meaning users earn limited returns but face unlimited downside risk.

DeFi protocol developer crews.eth sarcastically commented on the situation, saying, "This breakdown chart is insane, users must be very reassured when they see this, right?"