The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model

The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model

Note: The recent suspension of redemption on crypto lending platforms one after another has triggered panic among crypto market participants and a sharp drop in the crypto market. By sorting out the core model of the centralized encrypted lending platform and its actual operation method, this article explains the inevitability of such platform thunderstorms, how to avoid such funds in the later stage, and the possible direction of DeFi in the future.

1. What is crypto lending

Cryptocurrency lending is a novel financial tool for quick access to liquidity, allowing cryptocurrencies to be collateralized to obtain loans. Platforms that provide crypto lending generally also provide deposit services. Depositors earn interest income by depositing cryptocurrencies into their deposit accounts. interest rates) to attract crypto deposits.

Crypto lending platforms generally lend to institutions or individuals in the form of over-collateralization on the platform, and also require instant financing (leveraged trading or short-selling, etc.) of participants over-collateralized borrowing.

Crypto lending does not require a credit investigation of the borrower (but may involve varying degrees of identity verification and funding source review), but the borrower needs to mortgage the cryptocurrency to the lender, and the lender generally deposits the collateral into an escrow account after receiving the mortgage. . This is different from P2P lending, which is generally a credit loan for a project and generally does not involve collateral.

2. An Overview of the Centralized Crypto Lending Market

In 2020 alone, the assets under management of the three largest CeFi lending platforms increased by 734%. Celsius and BlockFi each hold more than $4 billion in assets, and Nexo’s assets under management are about $2 billion. The three largest CeFi platforms have a combined total of nearly $7 billion in assets locked on their platforms.

The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model

3. The role of crypto lending

Promote market arbitrage:

Cryptocurrencies are still an emerging asset class with low market liquidity leading to high volatility in cryptocurrency prices. Lack of liquidity often creates arbitrage opportunities, for example, if different cryptocurrency exchanges have different liquidity levels, there are different trading prices at the same time.

Crypto lending provides liquidity to institutional investors such as hedge funds, crypto exchanges or market makers, allowing them to take advantage of these arbitrage opportunities to earn the difference. The more market participants involved in arbitrage trading, the smaller these arbitrage opportunities, and the more efficient and stable the entire crypto market becomes.

Provide liquidity to crypto institutions:

Due to the relative lag in supervision, it is difficult for institutions involved in crypto activities, such as miners or crypto investment institutions, to obtain liquidity through the traditional financial system, and many cannot even open bank accounts. Generally, they can only obtain liquidity in the form of crypto lending.

As cryptocurrencies are gradually recognized by regulation and their value is determined at the legal level, the application scenarios of encrypted lending will inevitably expand. Entering 2022, more and more CEFI or traditional financial institutions begin to accept margin loans with BTC as collateral, such as Silvergate Bank’s $250 million loan to MicroStrategy. But overall, the window for crypto institutions to obtain dollar liquidity remains narrow.

Improved efficiency and inclusion of financial resources:

Due to the technological attributes of crypto lending itself and the digital attributes of collateral, it is possible to quickly process multiple transactions and businesses in a short period of time. Compared with traditional financial institution lending, it has a huge efficiency advantage. At the same time, encrypted lending on the chain eliminates the need for credit evaluation of borrowers, and the recognition of coins does not recognize people, which improves the inclusiveness of financial services.

4. General terms of crypto lending and the actual situation of CEFI

By sorting out the general terms and conditions of crypto loans on NEXO, BlockFi and other platforms, the following features can be found:

  1. The value of the loan is determined according to the LTV (Loan-to-Value) given on the platform. The value of the collateral is calculated by the platform based on market prices and related policies.
  2. The platform has the ownership and all joint and several rights and interests of the collateral during the outstanding period of the relevant loan, and can dispose of the collateral in any way at its own discretion. This is more controversial, because in the general mortgage loan rights and obligations relationship, the lender only obtains the security interest rather than the ownership of the mortgage, and the security interest is generally subordinate to the creditor’s right.
  3. If the LTV increases beyond the maximum allowable value, the platform shall liquidate the necessary amount of collateral to bring the LTV back to normal levels after notifying the client as far in advance as possible. Due to the volatility of the digital asset market, clients need to be aware that advance notice may not be technically possible prior to the relevant liquidation, it is the client’s sole responsibility to monitor the prevailing market conditions at any given time and maintain the collateralization rate at a normal level in full accordance with these general terms .
  4. For the determination of LTV, the current (Monday, July 4, 2022) NEXO and BlockFi webpages are displayed as follows:



  5. The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model
  6. The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model
  7. Crypto loans are calculated according to compound interest.

    According to a February 2022 U.S. SEC investigation into BlockFi, from March 4, 2019, when BlockFi’s certificate of deposit service BIA was launched, BlockFi stated on its website and various promotional materials that its institutional loans were “usually” over-collateralized , and the LTV is less than 50%.


    In fact, the LTV used in most institutional loans is higher than this number, because institutional investors are usually reluctant to provide over-collateralization, and the lending market is fiercely competitive, and platforms usually only relax mortgage requirements to obtain business. According to SEC survey data  , about 24% of institutional crypto asset loans in 2019 were overcollateralized; only about 16% were overcollateralized in 2020; and about 17% were overcollateralized in the first half of 2021.

    In practice, the mortgage rate is much higher than required, which leads to the core risk control method becoming a display, and the risk level of the entire loan asset is greatly increased: slight fluctuations in the price of the collateral will cause the entire asset to face liquidity risk. This arrangement also leaves individual investors actually taking on more risk.

  8. The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model

5. General terms of encrypted deposits and the actual situation of current CEFI

By sorting out the deposit terms of the relevant platforms, the following characteristics can be found:

  1. Users can choose a regular period or a current period. CDs can be used as additional collateral in the event of insufficient LTV. Interest can be issued in the deposit currency (compound interest) or in platform tokens (simple interest), and can be switched arbitrarily between the two (take NEXO as an example). If users choose to use platform tokens as interest income, the platform will provide additional interest income as an incentive. Users can deposit or redeem products at any time. Generally speaking, similar platforms will attract customers through high yields (as shown in the figure below). This picture was taken on July 4, 2022. Although there have been thunderstorms on many platforms, NEXO still puts this high-yield gimmick on its official website.



  2. The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model
  3. The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model
  4. BlockFi also makes it clear in the terms of rights and responsibilities of its deposit account that it is not responsible for any loss of funds caused by network attacks or technical problems. For a business operating in technology (at least that’s what they say), such a disclaimer is a bit odd.


  5. The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model
  6. Based on the characteristics of the certificate of deposit itself, that is, an investment contract sold to the public that can bring expected monetary returns, the US SEC issued a regulatory letter to BlockFi on February 14, 2022, pointing out that its certificate of deposit is essentially a security. BLOCKFI currently clarifies in the comments section on its website that BIA is not a bank or securities account and therefore will not be subject to regulatory protection.
  7. From March 4, 2019 to present, BlockFi offers and sells BlockFi accounts BIA to investors through which investors lend crypto assets to BlockFi in exchange for their promised interest income. According to the SEC, BlockFi advertised that BIA balances of up to 25 BTC or 500 ETH (equivalent to about $100,000 and $70,000 respectively at the time) would receive an annualized 6.2% return on all balances Earn a 2.0% annualized income tiered rate if you exceed this limit. However, SEC forensics found that as of November 1, 2021, BlockFi is actually paying investors between 0.1% and 9.5%, depending on the type of cryptoasset and the size of the investment. The benefit to the depositor is that the depositor can redeem the deposit at any time.

6. Fund operation?

The current CEFI model can be simply analogized to the capital pool/capital disk business. The fund pool is a long-standing non-compliant financial business familiar to domestic investors, and it is an illegal act of absorbing funds by means of high interest rates and storage at the fund raising end. The asset side uses the opaque characteristics of the asset pool itself to move assets within the pool and artificially match risks and returns, resulting in huge systemic financial risks.

According to the regulatory documents of domestic financial institutions, wealth management pools can be defined as “irregular capital pool business refers to multiple wealth management products of different types and different maturities corresponding to multiple assets at the same time, and it is impossible to achieve separate accounting and standardized management of each wealth management product. .”

This kind of fund pool business generally continuously raises funds by rolling out multiple wealth management products of different maturities to maintain a balance between the source of funds and the use of funds, and the funds are invested in bonds, notes, trust plans and other assets. Fund pool wealth management products usually have the characteristics of “continuous offering, collective operation, term mismatch, and separate pricing”. At the same time, in order to ensure the smooth fundraising, the fund pool usually also has the characteristics of high interest rate and storage.

Continuous offering and high-interest savings: Continuous offering refers to the continuous offering of wealth management products to raise funds. Judging from the terms of the certificates of deposit of most CEFI platforms, users can deposit or redeem tokens at any time, and some can even change the interest calculation method at any time. At the same time, as mentioned above, most of the platforms have the situation of attracting investors with high yields.

Collective operation: Collective operation refers to the collection and management of raised funds, which are uniformly applied to a collective asset package composed of various underlying assets that meet the investment scope of this type of asset pool. . According to the SEC’s investigation  , BlockFi opened BIA accounts to investors in exchange for capital investment in the form of encrypted assets. BlockFi brings together the encrypted assets of BIA investors and uses these assets for lending and investment, and the investment income and interest income are shared by BlockFi and BIA investors. According to the Texas Securities Association  , Celsius also “uses cryptocurrencies that investors keep in interest-bearing accounts for free, mixes coins from various sources, invests in traditional financial assets and cryptocurrency assets, lends to institutions and businesses people, and engage in any other activities at Celsius’ discretion.” The biggest problem with collective operations is the opacity of operations, which provides a stage for high-risk operations and benefit transfers.

Term mismatch: Term mismatch refers to the term of the source of funds in the asset pool, which is not exactly the same as the term of the fund user (collective asset package). Term mismatch, especially the long-termization of the asset side, combined with the short-termization of the liability side, makes it easy for institutions to stampede, which in turn causes market panic, and the platform only announces a withdrawal/withdrawal freeze. The chart below shows that BlockFi is rumored to have long-term (3-year) borrowing with very high LTV.

The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model

Celsius’ investment in stETH and WBTC, Three Arrows Capital’s investment in Grayscale Trust shares, and investment in the primary market by such asset pools are typical liquidity crises caused by term mismatch. Most of the funds raised by the CEFI platform are current properties and can be redeemed at any time, but their investments are long-term investments.

Separation pricing: Separation pricing refers to the income level of various wealth management products offered by the same asset pool. Generally, it is not directly linked to the actual income of the collective asset package during the storage period of the wealth management product, but is based on the expected return of the collective asset package. Yield separation pricing. This pricing method will result in a mismatch between the actual risks and benefits of customers and BlockFi. The figure below is an example of Bitconnect. The more funds users put in, the higher the “guaranteed” interest rate, and the shorter the payback period. The interest rate is not linked to the actual underlying asset income.

The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model

Separation pricing also leads to underpricing of risk, creating a so-called “death spiral” in down markets. Institutions have to invest in investments with higher returns due to the promise of high returns. Similar to the sharp cooling of market sentiment towards these high-risk crypto projects after the crash of luna, Celsius is already facing redemption pressure. As of May 17, the value of assets locked on the Celsius platform has shrunk sharply to less than $12 billion from more than $28 billion at the end of December. In order to meet the 17% rate of return promised to customers, Celsius had to take risks and carry out some high-risk operations in the case of the overall shrinking of DeFi yields.

As a result, Celsius has been using customer tokens to participate in some high-risk projects, and there has been a series of thunderstorms:

  • $120 million lost in the BadgerDAO hack last December;
  • The division took out $500 million in UST on Anchor in the Luna incident in May (avoided losses);
  • The tilt of the stETH/ETH pool may expose the company to liquidity risks.

Especially when the crypto market as a whole fell and customers rushed to exchange BTC or ETH, they found that the company had suspended the withdrawal and transfer functions, which intensified panic.

It can be seen that the current encrypted lending platform has the above four characteristics at the same time, and it is a typical capital disk.

7. Is DEFI better than CEFI?

At present, it seems that in the absence of effective supervision, the operation of CEFI has inherited the mode of capital disk in traditional finance, and has become a hotbed of non-compliant financial operations, posing a major threat to the further development of the encryption ecosystem.

So will the situation improve when DeFi deals with these problems? The answer is yes. In the actual execution process of DeFi smart contracts, it solves the problems of opacity on the asset side and counterparty risk (trustless), effectively slowing down the accumulation of financial risks.

However, as to whether the collective operation of funds will eventually be formed and effective risk pricing will be formed, no project has yet seen a solution to this problem.

8. So, is the thunderstorm over now?

The capital disk of continuous thunderstorms: reflection on the CeFi encrypted lending market model

On June 29, Three Arrows Capital declared bankruptcy and liquidation. Three Arrows Capital is currently one of the largest lenders and customers in the global crypto lending market. Almost all institutions in the picture have business dealings with Three Arrows (except NEXO and CoinLoan, which have claimed that they have no exposure to Three Arrows). The bankruptcy and liquidation of Three Arrows will have a chain reaction on the market, and a large number of institutions will be forced to bear losses, write down their balance sheets, or even file for bankruptcy directly.

On July 6, Voyager Digital, which had 3.5 million users and managed $5.8 billion, declared bankruptcy. Further liquidation actions in the crypto market in the future should be a high probability event.

reference document:



Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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