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Lending

In the spirit of transparency, my motivation for writing this particular piece is largely driven by my unnerving desire to use the term ‘Bebentralized Binance’ and so, what the heck! Let’s get it out there and move on.

Anyway:



The world’s largest cryptocurrency exchange Binance has ventured into the lending space, according to an announcement Monday. The new offering, dubbed “Binance Lending,” allows holders of BNB token, Ethereum classic (ETC) and Tether (USDT) stablecoin earn interest on their funds.



Some Bloomberg columnists called Matt Levine like to argue that one way of thinking about the development of blockchain-related financial products is as the re-learning of modern capitalism, but for the most part I think it’s just about Binance practicing indiscriminate revisionism and claiming time-old services as innovations of their own. Just look at their name! And now, thanks to finance luminary CZ, we have Initial Exchange Offerings, Binance DEX, and the latest offering, Binance Lending. If things continue on their current course, it truly will not be too long before banks all relocate to Ball Street.

Binance Lending is not a surprising development – lending is both a (indirectly) profitable and highly sought-after feature – but it does have some interesting implications for the existing cryptocurrency exchange landscape. Despite best efforts from competitors, BitMex has long dominated the leveraged trading vertical primarily due to its ever-nebulous ‘network effects’ and, more quantifiably, a superior trading engine. A purveyor of its own network effects, Binance’s emergence onto the margin scene represents the first serious challenge to BitMex’s hegemony.

It will not be the last. With Coinbase rumoured to be releasing a similar product of its own in coming months, leverage will soon become a matter of table stakes, forcing operators to expand their horizons and increasingly offer ancillary products across the cryptocurrency services stack: staking, custody, commerce, customer service, primary issuance.

Binance Lending is not a surprising development but it does have some curious features that we should probably not expect to be standardized across competitors: (1) Max leverage at 3x, which is remarkably conservative compared to BitMex’s 100x for Bitcoin (2) 10 million cap on USDT lending and 1 million per account cap on USDT borrowing, which seems rather insignificant for an exchange that saw over $1 billion in 24-hour volume (3) initial asset selection, which has been limited to USDT, BNB, and Ethereum Classic, is, barring USDT, perhaps non-obvious (4) rather than relying on market forces, Binance has pre-set terms and guaranteed interest themselves. This is to say they will guarantee USDT lenders 10% APR no matter borrow demand: if users lend 10 million USDT over a year and just 50,000 USDT is generated in interest, Binance will make up the 50k USDT difference itself.

On closer inspection, the rationale behind these latter two features becomes increasingly obvious and requires reframing an earlier point in this piece. Another way of looking at Binance’s entrance into the world of financial services is less as a means of co-opting finance or providing a superior user experience and more a path to protecting and driving value to its native token, BNB. There are suggestions that Binance will soon allow users to stake BNB in order to participate in the Binance DEX validation process. Access to Initial Exchange Offerings required users to stake BNB. Now we have a product that guarantees BNB lenders 15% APR, driving demand for BNB while ensuring that circulating supply falls as BNB is taken off the market. And trust me, it will be taken off the market: BNB borrowers will pay 109.5% APR (versus the 10% they will pay on USDT) and even those that fall into the ‘VIP 8’ user tier (I personally feel that the VIP allure starts to wear off after tier 5…) will be limited to a 1,000 BNB limit. Like Russia’s election process, speculators are free to short BNB at will, but they will pay a heavy price. Meanwhile, 15% on the maximum subscription cap of 200,000 BNB comes to roughly $750,000 in interest over a single year, a slim price to pay to protect Binance’s 80m BNB (~$2 billion) treasury.

A natural question to ask is what does Binance’s foray into lending mean for Decentralized Finance? To date, ‘decentralized lending’ has been the runaway success of Open Finance — does Binance Lending disrupt the disruptors? Well, not quite, not yet. A missed opportunity, Binance’s USDT borrow rates are roughly aligned with the USDC Weighted Average Borrow Rate. Undercutting the stablecoin borrow market and absorbing market share itself seems like an obvious and expected move from the historically ruthless folks at Binance.

But perhaps CZ truly is playing 6D Settlers of Catan: setting USDT rates at par to decentralized alternatives is in many ways a statement of confidence, an indirect way of saying “yes, hello friends, nice little lending game you have over there: it would be a shame if someone were to Bebentralize it.”

Opyn

Meanwhile, the decentralized lending/margin landscape is undergoing a degree of disruption itself, perhaps to be expected in an industry largely defined by permissionless interoperability or what those not active in open source software might call ‘stealing’. Disappointingly I will have to save my lending landscape thesis for another day, although I will leave you with a short note on Opyn.

Several weeks ago I discussed the Open Finance value proposition and part of my three-point definition included this concept of ‘permissionless innovation’, the notion that developers can combine financial primitives to iterate on products at speed and with ease. Of all existing products on the market, Opyn, a leveraged trading platform, best epitomizes this permissionless property, combining Uniswap, Compound, Kyber, and dYdX on the back-end while providing a user-friendly interface on the front-end, all for just a 0.8% trading fee. In the grand scheme of things I tend to think of permissionless as an aspirational quality but Opyn is a good example of how things can get a bit out of hand.

Presumably born out of an urgency to distinguish itself among competitors, Opyn recently introduced a 6x leverage feature. This initially came as a surprise to me – Opyn uses dYdX and Compound lending pools to source borrow liquidity and both platforms currently require a minimum collateralization rate of 150% and 125%, respectively. How does 6x come into play?

As it happens, dYdX has set a minimum collateralization of 125% through its interface, but liquidation proceedings only begin once collateral slips below the 115% threshold. Opyn has simply bypassed dYdX’s internal policy and set its minimum collateralization to 120%. Liquidation proceedings still start at 115% though, so a 4.16% downswing, hardly an irregularity in today’s market, will be enough to wipe out an entire position. That Opyn sources some of its liquidity through Uniswap, which, by design, is subject to deterministic slippage, means that users may find themselves auto-liquidated at the very point which they open a 6x long.

Permissionlessness — yes, that’s a word now — is in many ways a double-edged sword: as moats become less defensible and fees compress, companies at the margin will invariably be forced to branch out to higher-yield, higher-risk offerings. Retail consumers will compose a large percentage of the target market. To some extent the transparent and largely incentive compatible properties of Open Finance should help mitigate some concerns, but it’s probably also worth bearing these risks in mind before we are confronted with a full-fledged censorship resistant Binancial Beltdown the likes of which we have never quite seen before.