Nexo's Business Model in Depth and at Length
Nexo has grown as a company, and so has our offering, but the underpinning principles remain the same. With this post, we would like to shed some light on Nexo’s business model and how it might differ from that of others.
Take a look at the chart below and let’s unpack it:
Since 2018 the core of Nexo’s business is the facilitation of collateralized credit. Where we differ from others is our battle-tested real-time risk engine. We require highly liquid collateral at appropriate loan-to-value ratios, regardless of whether we’re dealing with retail or institutional clients.
Nexo’s core services complement each other and make the enterprise profitable. Тhey include:
- Crypto-backed loans, margin lending and institutional OTC loans made on a collateralized basis
- Earn interest products and staking
- Trading services (spot, futures, options, otc, etc.)
Let's dive deeper.
Nexo extends the assets from its Earn Interest product as loans to clients looking to borrow against their crypto in one form or another. Higher Earn rates are commonly subject to fixed terms, thresholds and token requirements to keep effective rates paid on our AUM well below the theoretical maximum.
On the other hand, the company profits on the positive net interest spread between the interest rate it receives and the yields it pays to interest-earning clients. Borrowing rates start at 6.9% and are no higher than 13.9%, while being conservatively collateralized.
Jane wants to earn interest on $130K in stablecoins (4-8% APY). John wants a Tesla and borrows Jane's $130K against his $260K in BTC. John transfers the BTC to Nexo and Nexo transfers Jane's stablecoins to John (13.9% APR). All transactions are collateralized.
The spot, futures, and options trading we offer via Nexo Pro and Nexo Prime accounts is a natural extension of our lending services, as margin is essentially a loan for the direct purpose of leveraged trading. Funding rates and fees can be significant in volatile periods.
Mary has $100K in her Nexo Pro account and wants to go long BTC with 3x leverage. Josh has 300K USDC he wants to earn interest on. The 300K USDC is lent from Josh to Mary via Nexo. We charge her a fee which is then shared with Josh. All transactions are collateralized.
To protect both the clients that pay us interest and those we pay interest to, Nexo has the most efficient price-based collateral liquidations engine, and it has been battle-tested since 2018 in periods of high volatility without ever having lost a dollar.
In fact, Nexo’s automatic repayments system is similar to DeFi Protocols like Aave or Maker. Should the collateralization ratio fall below 120%, portions of the collateral are automatically liquidated on several exchanges.
Compared to Aave and Maker, however, our liquidation engine is diversified across both centralized and decentralized exchanges, making Nexo much more efficient in execution and resilient to liquidity crunches.
Our trading services, i.e. Nexo Prime and Nexo Pro, don’t rely on in-house matching engines and order books (like traditional crypto exchanges) but aggregate liquidity from various venues via smart order routing. Clients get best prices and access to cheap liquidity; Nexo can charge spreads and fees – a win-win.
All of these activities – exchange services, crypto-backed loans, collateral liquidations, staking, etc. are revenue generators that require Nexo to hold on and move balances across a number of exchanges and DeFi protocols as part of our standard operations.
As a byproduct of Nexo holding balances across different exchanges and protocols, the company can seize opportunities for alpha generation in market-neutral ways for its clients and its own treasury.
Here are a few examples:
Reverse cash-and-carry arbitrage, which combines a short position in an asset and a long futures position in that same asset, capturing the funding rate which, at times, can be substantial, especially during downturns.
A market-neutral strategy in periods of heightened volatility involves price arbitrage – an asset is simultaneously bought and sold on two exchanges, capturing the spread. Few can capture that as it requires an inventory of various assets across different platforms.
Additionally, as PoS blockchains have gained prominence and market share (most notably after the Merge), staking has become a sustainable and scaleable source of yield offering fixed margins at any size.
Nexo’s products and market-neutral strategies add up to significant income and allow the company to offer a sustainable Earn Interest Product without the need for uncollateralized lending. To capture the above opportunities, we keep balances on exchanges and DeFi protocols.
Counterintuitively, having a lot of idle assets in cold wallets implies business weakness as it suggests that the company is unable to generate returns on clients' funds. Nexo is in the business of generating value for its clients and thus needs to manage the entrusted assets actively.
In contrast, a traditional centralized exchange has its own internal order books and matches all of its clients' orders to buy and sell. It, therefore, must keep all its assets on-chain (which means the assets of its users, including companies such as Nexo).
Many exchanges are now publicly disclosing addresses in an attempt for Proof of Reserves. The shortfall is it only shows one side of the equation: the assets, omitting whether those assets exceed liabilities. Nexo is among the very few to show this.
To continue to provide the full suite of Nexo services, Nexo has assets both on-chain and off-chain for the above-described reasons. We, therefore, need an independent auditor to monitor all those assets and draw the necessary conclusions.
Proof of Reserves matter, and so to be as transparent as possible, in 2021, a PCAOB-certified auditor and leading US accounting firm helped Nexo pioneer a real-time attestation of custodial assets to show that our assets exceed customer liabilities.
With regards to the NEXO Token and our reserves:
- Less than 10% of our own assets are in NEXO Тokens and we have never used the NEXO Token as collateral for receiving loans.
- We also do not lend NEXO to institutions.
The concentration of NEXO Tokens in clients’ balances in Nexo’s wallets is structural as clients get the most value out of NEXO when secured on the platform, just like BNB.
The events of the past months are a painful reminder that in order to generate returns in the markets safely, companies must adhere to stringent risk management protocols. Here we think that actions speak louder than words and would like to point to Nexo’s track record. 👇
Our risk management ensured that we had $0 exposure to:
- Genesis, Gemini;
- Luno, BlockFi;
- Three Arrows Capital;
- Celsius, Babel, Hodlnaut;
- Struggling crypto miners.
Nexo’s treasury management ensures we have effective asset liability management. Nexo is resistant to bank runs because we have no currency, maturity, or interest rate mismatch.
We have consistently refused to extend uncollateralized loans to the high-flying crypto asset managers. It is a fundamental principle for Nexo that has resulted in no bad debt during market turmoils.
Instead of grabbing market share by uncollateralized business, we kept our focus on automated, collateralized credit facilitation. Positive margins, scaleable, sustainable.
Nexo is above all a product company, and we will continue to deliver on our vision of a crypto finance product suite – both custodial and non-custodial while pushing the boundaries of transparency and raising the bar for the industry.
Born in a bear market, Nexo has mastered and thrived in more than one downturn. When the markets are experiencing maximum pain, it usually is the worst time to sell. That is why in 2018 we developed our signature instant crypto-credit lines.
We are now in a phase that is seeing organic consolidation that will allow Nexo to realize economies of scale, offer even better terms to our clients, and focus on building new products and features.
Stay safe and take care of each other.