Several cryptocurrency lending companies have gone bust amid bad practices and exposure to bankrupt companies, with the latest being BlockFi.
Late Monday, BlockFi filed for Chapter 11 bankruptcy protection in the United States, coming weeks after the company paused user withdrawals. BlockFi is the latest to bow out due to exposure to Sam Bankman-Fried’s cryptocurrency empire early this month. In its filing, the company named over 100,000 creditors and $1 to $10 billion in assets and liabilities.
Lending companies appear to be at the far-receiving end of the liquidity crunch waves that plagued the cryptocurrency industry this year. Within the span of six months, the majority of crypto lenders have been weeded out. However, one such company, Nexo, remains rather resilient and going, apparently. But is Nexo really safe?
What is Nexo doing differently?
Following BlockFi’s demise, many cryptocurrency users now have Nexo on their radar for the slightest mischievous action that could warrant red alerts. Seeing the storm ranging, Nexo published a long thread of tweets to clarify its business practices and why its operations are different from other counterparties that have collapsed.
Nexo offers different crypto services that include crypto-backed loans, margin lending & institutional OTC loans; earn-interest products & staking; and trading services (spot, futures, options, OTC, etc). However, the company said its primary line of business is facilitating collateralized credit, solely based on liquid collateral at appropriate loan-to-value ratios for both institutional and retail customers.
Unlike other companies that lend to large companies and trading desks like Genesis, Nexo claimed that assets from its Earn program as lent to customers looking to borrow against their crypto deposited on Nexo, with borrowing rates starting at 13.9%.
Nexo also claimed to have the most efficient and battle-tested price-based collateral liquidations engine that protects the parties involved. The company likened its system to that of DeFi protocols like Aave or Maker, which will automatically liquidate a position should the collateralization ratio fall below 120%.
Is Nexo profitable?
Nexo said its services are profitable. For one, the company said it generates profits from lending through the positive net interest spread between the interest rate it receives and the yields paid back to depositors. The company also said it charges spreads and fees from customers when using its trading services.
All 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 & DeFi protocols as part of standard operations.Nexo
Nexo’s Proof of Reserve
Nexo failed to publish addresses to its reserve but claimed that its assets surpass customer liabilities, based on a 2021 audit by a PCAOB-certified auditor and leading US accounting firm. Also, the company claimed that its native cryptocurrency NEXO Token only constitutes less than 10% of its assets.
The company also refuted having any exposure to FTX/Alameda; Genesis, Gemini, Luno, BlockFi; UST/Luna, Three Arrows Capital; Celsius, Babel, Hodlnaut; and Struggling crypto miners.
Red flags – Can Nexo be trusted?
The tweets are clearly efforts by the company to clarify its operations and reassure transparency in light of other lenders’ fallout. However, the stunning events that played out this month have taught the majority of cryptocurrency not to rely completely on any statement from the company at face value.
Similar to other collapsed lending companies, many people fault Nexo for offering as high as 10% on stablecoins, compared to the 1% yield on DeFi protocols and 4.5% on short-duration US Treasuries. Also, NEXO Token reportedly makes up about 85% of the company assets on Ethereum, per Dune Analytics data.
Nexo is also accused of operating more like a hedge fund than a bank. Some profit-making activities by Nexo essentially constitute market-making, the same business line of Genesis and Alameda, which are currently insolvent.
Many also disputed Nexo’s claims that neutral-market strategies make up a significant portion of its income, which is used to sustain the Earn Interest service.