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The crypto borrowing and lending platform Nexo recently provided transparency into exactly how its business makes money.
Its lengthy breakdown follows the collapse of numerous high-profile crypto lending firms that were overexposed to defunct projects and businesses.
Nexo’s Business Model
As Nexo explained in a Twitter thread on Monday, Nexo’s primary business strategy is to facilitate collateralized credit. Its core services include crypto collateralized loans, interest-bearing crypto accounts, and spot, futures, and options trading.
Through its Earn product (crypto interest accounts) the company accrues funds for extending loans to other clients. By charging higher interest on client loans than the yield it provides its creditors, Nexo generates a net profit.
By requiring 2:1 collateralization for the loans it issues, Nexo ensures that it always has enough to pay off creditors – even in the event of its borrowers defaulting. While crypto collateral can indeed be volatile, the firm also uses an auto liquidation mechanism to ensure collateral is sold before falling under a 120% value to loan ratio.
“All these activities are revenue generators that require Nexo to hold on and move balances across a number of exchanges & DeFi protocols as part of standard operations,” explained Nexo.
Many crypto companies, including lenders, lost money to FTX this month due to merely holding funds inside the firm. The exchange, which filed for bankruptcy alongside its sister firm Alameda Research, is thought to have commingled client assets with the trading desk.
Two of those firms include BlockFi and Genesis Trading – the former of which also filed for bankruptcy on Monday. However, Nexo claims to have held no exposure to FTX, Alameda, Celsius, or any other firm to go insolvent this year.
“We have consistently refused to extend uncollateralized loans to the high-flying crypto asset managers,” wrote Nexo. “It is a fundamental principle for Nexo that has resulted in no bad debt during market turmoils.”
Unlike FTX, the company further asserted that it has never used its native token, NEXO, to collateralize loans it receives.
Proof of Reserves?
Nexo said it is incapable of providing full proof of reserves for its assets – a newly popularized blockchain-based solution for auditing centralized crypto custodians. The company must hold its clients’ funds across multiple exchanges and DeFi protocols in order to generate revenue through trading.
As such, the company uses an independent auditor to monitor all of its assets and liabilities.