DeFi leverage is spreading to exchanges

Written by: Huang Shiliang

Recently, I worked on the alpha mechanic of BN, which is quite popular in the industry, but I don't seem to be very interested in it. However, I would like to share the products of the other three BN, and feel the innovation ability of BN to follow DeFi, and then feel that the leverage risk of DeFi has spread to CEX.

I always thought that DEX vs CEX competition, I always thought that CEX should be very mature and there would be no major innovation, but BN's development over the years has completely slapped me in the face. Binance has indeed fully defended its CEX moat in the competition with DeFi, and has also seized a large amount of DeFi business.

It seems that as long as you are willing to invest and keep open, no matter how mature the product is, there is room for innovation.

These innovations of Binance make me think that Binance has made full use of DeFi innovations, combined with a centralized experience, which has really enhanced Binance's user stickiness.

The first product was actually a failure for Binance. But at that time, Binance dared to make this product, which still surprised me.

At that time (it should have been three years ago), Binance modeled on Uniswap's AMM protocol, and made a fund pool trading method on Binance, a CEX platform that allows users to add LP tokens, and the algorithm should be completely copied from the Uniswap v2 version. For example, users can add a pool such as BTC/BNB, and then other users can directly swap BTC to BNB, and the users who add the pool can earn fees.

We've heard a lot of big companies in all walks of life refuse to use new innovations because they launch innovative products that compete with their existing market, which eventually leads to the collapse of large companies.

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

Similarly, Kodak refused to make a memory card camera in order to keep its film business.

At that time, Binance dared to launch an AMM algorithm to add pools and swap transactions, and dared to try to directly hit the largest order book business on CEXs, and I felt quite determined at that time.

However, I overestimated the opportunity of the AMM protocol in CEXs, and the development was that Binance shut down the product.

The second product is Binance's current financial management, which is actually modeled after a fund pooling lending protocol like AAVE.

Binance's current savings are essentially a lending product. Users can deposit various coins into current wealth management to become a deposit pool, and users provide deposits, which can be used as collateral to mortgage other coins in current wealth management.

For example, you can deposit ETH into your current account, and then these ETH can be used as collateral, and you can borrow USDT. ETH deposits can eat deposit interest, and USDT borrowing needs to pay borrowing interest.

This pooled lending method, which is a peer-to-peer (P2P) lending method, greatly improves the efficiency and flexibility of funds. In P2P lending, the borrower's collateral cannot eat the deposit interest. The funds of deposit lending users also need to be matched before they can be lent out, and when they are not matched, they will not be able to eat interest. Pooled is always interested, as long as someone borrows, all deposits are split equally according to the amount of funds, and depositors can redeem deposits at any time (in the vast majority of cases) unless a run occurs.

I checked multiple other exchanges, and the lending business is still P2P, and only Binance offers this pooled AAVE model. Obviously, this model provides users with better demand interest and more flexible leverage opening conditions (eating demand interest and borrowing coins).

These new advantages are brought to you by DeFi and are used by centralized institutions like BN.

The third product is BN, which issues liquidity token products such as BFUSD and FDUSDT according to the model of restaking.

To put it simply, BFUSD means that users can use USDT and USDC to buy a financial product on 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 futures account for users to speculate in contracts.

In this way, users can use a fund to obtain the income of the financial products they buy, and they can go to the contract to bet on the size.

The similar FDUSDT token is actually the liquidity token of Binance Current Savings, which is equivalent to AAVE's a-token, that is, after users deposit USDT into Binance Current Savings, Binance gives users an FDUSDT token, and then users can use this token to speculate in contracts.

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

Of course, betting contracts, statistically speaking, are often a small part of the money, in the long run, most people are going to lose, this product is really crazy.

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

This kind of innovation in DeFi has been learned by CEXs, and in several large exchanges, I have only seen BN do it, and other CEXs don't do it. This is also a strange thing, don't other CEXs know this kind of capital efficiency, a fund is used many times, has always been the biggest demand for gambling? Are they all restrained?

I guess one possibility is that these DeFi tricks and tricks are essentially leveraged, which are destined to amplify the risks brought by volatility, and if you want to smooth out these risks, so that when big volatility comes, you will not be exposed to various leveraged products, which requires a very large market depth, which may be a condition only available to Binance.

Seriously, three years ago (before 2022) I was a deferred DeFi and thought the composability of money was so good, and that's what finance needs, that's what capitalism needs. But after round after round of big fluctuations in the market, the price of ETH has fluctuated huge every time without exception, and I feel that DeFi's leverage carries some kind of original sin.

Now that CEX has learned this, I don't know if it will evolve into a catastrophe in the future.

Please keep in mind that no matter what the agreement is, no matter what tricks are used, a fund is used many times, it is to open leverage, it is to amplify the volatility risk, the more it is used, the greater the risk.