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Nexo adds PAXG gold stablecoin as collateral option

Posted: 26 March 2020 2:33 pm
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The new feature highlights some of the unique characterstics of cryptocurrency as an asset class.

Cryptocurrency lending platform Nexo has added the PAXG gold-backed stablecoin as a collateral option when using the platform. This means users can now borrow a range of fiat currencies against the gold-pegged cryptocurrency.

"Especially in high-volatility times, as in the present, gold is sought after by many of our retail clients and we have worked towards reflecting their wishes," said Nexo co-founder Antoni Trenchev.

The ability to earn interest on those gold backed stablecoins is probably also on the Nexo user wishlist, but it doesn't appear to be possible yet.

Nexo's interest only pays out for fiat currency (USD, EUR, GBP) and stablecoin (USDT, TUSD, USDC, PAX, DAI), giving Nexo users up to 8% p.a. in compound interest, paid daily.

Hang on, did someone say 8% p.a. compound interest?

You heard right.

Nexo is a cryptocurrency lending platform. These types of platforms are neat examples of a practical cryptocurrency application. One of those applications is paying comparatively high rates of interest, similar to a very high interest savings account.

Nexo's 8% compound interest is probably on the higher end of what these kinds of platforms pay, but there are other nuances to consider too, like minimum deposits, lock-in periods and whether it's worth trading better rates for simple interest.

It's definitely one of the better-known cryptocurrency lending platforms though. While no two platforms are exactly the same, they all tend to work a lot like peer to peer lending.

Basically, people entering from one side are there to get loans by using cryptocurrencies like Bitcoin, Ethereum, PAXG and many more as collateral.

People entering from the other side are there to earn interest by putting their money on the platform. Their money is used to fund the loans.

So far, so normal. It's basically how banks work.

The real question then, is how can places like Nexo hand over 8% per annum while banks are only scraping up a fraction of a percent?

Secret sauce

One of the main reasons 8% seems so high is because savings account interest rates are so low. A big reason for this is because shareholders eat first and customers get the dregs. It's not just bank bashing, it's a numerical fact.

And on the cryptocurrency lending platform's end, high rates are made possible largely by the low-to-nonexistent credit risk.

On these platforms, borrowers will typically never be able to get a larger loan than they have cryptocurrency collateral available. If the borrower can't make repayments or if the value of their crypto collateral falls too far, the lender can partially liquidate their collateral to re-align things.

This is where cryptocurrency as an asset class starts to shine. It has a lot of features that actually make it very safe and useful as collateral.

  • It's divisible so the collateral can be partially liquidated at a fair price when needed. You don't usually get this with other assets. It's not like the lender can rip off and sell your car wing mirror if you miss a car loan repayment.
  • It's reasonably liquid and there's always a 24/7 cryptocurrency market chugging away, so you can automate partial liquidation as needed to maintain loan to value ratios.

In short, it's a lot like money. Unsurprisingly, money would theoretically be very reliable collateral for a loan, although using cash to up a cash loan would kind of defeat the purpose.

But not so with cryptocurrency. In this way, perhaps the most important feature cryptocurrency delivers, which makes it useful as loan collateral, is the fact that it can't be spent as money and most stores don't accept it.

If cryptocurrency was real money, no one would need to use it as collateral for cash loans.

Anyway, the end result is that borrowers on these cryptocurrency lending platforms often pay 5% or more in interest, plus fees, for a fully secured loan, while the lender gets almost zero credit risk and doesn't necessarily have to spend any money on credit checks or chasing defaults.

The savings from this super efficient system are passed onto depositors, in the form of high rates.

Of course, these systems also tend to be largely unregulated and depositors don't get the safety of things like FDIC insurance in them, so let's not go nuts here.

Still, cryptocurrency loans are an excellent example of how new business models can be built to take advantage of the unique characteristics of cryptocurrency as a novel asset class. That's exactly what businesses like Nexo are doing.

And in the same vein, it's well worth noting that through tokenised assets and stablecoins we can start bringing those unique cryptocurrency characteristics to other asset classes. And that's what projects like Paxos and PAXG are doing.



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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