DeFi leverage is spreading to exchanges

I have recently studied BN's Alpha mechanism. This product is very popular in the industry, but I don't seem to be very interested in it. However, I would like to share three other BN products, and express my admiration for BN's innovative ability to follow DeFi, and then express my admiration for the spread of DeFi's leverage risk to CEX.

Before, I always thought that the competition between DeX and CEX, I always thought that CEX should be very mature and there would not be any major innovations, but the development of BN in recent years has completely slapped my judgment in the face. In the competition with DeFi, Binance has indeed fully defended its own CEX moat and also seized a large amount of DeFi business.

It seems that as long as you are willing to invest and remain open, even mature products have room for innovation.

These innovations of Binance make me feel that Binance has made full use of the innovation of DeFi, combined with the centralized experience, which has indeed enhanced Binance's user stickiness.

The first product was actually a failed product for Binance. But I was still surprised that Binance dared to make this product at the time.

At that time (it should be three years ago), Binance imitated the AMM protocol of Uniswap and made a fund pool trading method on the CEX platform of Binance that allows users to add lptoken. The algorithm should be completely copied from the Uniswap v2 version. For example, users can add a fund pool such as BTC/BNB, and then other users can directly swap BTC for BNB, and users who add fund pools can earn handling fees.

We have heard of many large companies in various industries refusing to use new innovations because launching innovative products competes with their existing markets, which eventually led to the collapse of large companies.

For example, Nokia was the first to invent smartphones, but it was afraid of impacting its dominant market position in feature phones, so it did not switch to smartphones on a large scale, and Nokia eventually failed.

Similarly, there is the case of Kodak refusing to make memory card cameras in order to keep its film business.

At that time, Binance dared to launch the AMM algorithm to add a capital pool and swap transactions, and dared to try to directly impact the largest order book business of CEX. I felt very determined at the time.

However, I still overestimated the opportunities of the AMM protocol in CEX. The development of the matter is that Binance closed this product.

The second product is Binance's current account wealth management, which is actually modeled after aave's fund pooling lending protocols.

Binance's current account wealth management is essentially a lending product. Users can deposit various currencies into current account wealth management to form a deposit pool. Users provide deposits, which can be used as collateral to pledge other currencies in current account wealth management.

For example, you can deposit ETH into current account wealth management, and then these ETH can be used as collateral, and you can borrow USDT. ETH deposits can earn deposit interest, and USDT loans need to pay loan interest.

This pooled lending method, benchmarked against peer-to-peer (P2P) lending, greatly improves capital efficiency and flexibility. In P2P lending, the collateral of borrowing users cannot earn deposit interest. The funds of deposit and loan users also need to be matched before they can be lent out, and if they are not matched, they will not get interest. The pooling method will always have interest. As long as someone borrows, all deposits will share the deposit interest equally according to the amount of funds, and deposit users can redeem their deposits at any time (in most cases) unless there is a run.

I checked many other exchanges, and the lending business is still P2P. Only Binance provides this pooled AAVE model. Obviously, this model provides users with better current interest and more flexible leverage conditions (earning current interest and borrowing coins).

These new advantages are all brought to everyone by defi, and are used by centralized institutions such as BN.

The third product is that BN issued liquidity token products such as BFUSD and FDUSDT according to the model of restaking to reuse liquidity tokens.

BFUSD simply means that users can use USDT and USDC to purchase a financial product of Binance, and then Binance will return a BFUSD token (liquidity token) to the user, and this token can also be used as collateral in Binance's contract account to allow users to speculate on contracts.

In this way, users can use one fund to obtain the income of the purchased financial products, and can also gamble on the size of the contract.

Similarly, the FDUSDT token is actually the liquidity token of Binance's current financial management, which is equivalent to AAVE's a-token. That is, after the user deposits USDT into Binance's current financial management, Binance will give the user an FDUSDT token, and then the user can use this token to speculate on contracts.

In this way, users can earn interest on current financial management and gamble on contracts with the same funds.

Of course, from a statistical point of view, gambling contracts often only make a small number of people, and in the long run, most people will lose money. This kind of product is really crazy.

This kind of liquidity token is used again in other protocols for mining, which is a specialty of DeFi. Well, it has been learned by CEX.

This kind of innovation in DeFi has been learned by CEX. Among several large exchanges, I only saw BN doing it, and other CEX did not do it. This is also a strange thing. Don’t other CEX know that this kind of capital efficiency, using one fund multiple times, has always been the biggest demand for gambling? Are they all very restrained?

I guess one possibility is that these DeFi techniques and tricks are essentially leverage, and are destined to amplify the risks brought by volatility. To smooth out these risks and prevent various leveraged products from being liquidated when big fluctuations come, a very large market depth is required, which may be the condition that only Binance has.

To be honest, if it were three years ago (before 2022), I would have admired DeFi and felt that the various composability of funds was too good. This is what finance needs, and this is what capitalism needs. But after rounds of big market fluctuations, the price of ETH has been huge fluctuations every time without exception. I feel that the leverage of DeFi carries some kind of original sin.

And now CEX has also learned these, and I don’t know if a huge disaster will evolve in the future.

Please remember that no matter what the agreement is, no matter what tricks are used, if a fund is used multiple times, it is leveraged and the volatility risk is magnified. The more it is used, the greater the risk.