“An investment in knowledge pays the best interest” – Benjamin Franklin
As we evolve our product set, we have been thinking long and deep about how we classify customers. Traditionally we and other exchanges typically classify customers as retail, institutional and market makers. It became apparent that in fact these all had huge crossovers. For example, we have retail (individual traders) that traded as actively and with as much volumes as some market making firms. So it dawned on us that the real differentiator from a classification perspective was how active they were as a trader.
Then it became a question of how we could give passive capital the same access and opportunities as active capital and how both can benefit at the same time from each other from the myriad of ways that yields can be generated from crypto markets in general and CoinFLEX in particular.
Both types of capital want to earn yield/returns but the key differentiator (other than how active they were) was that we could see that passive capital were happy to be “arbed” by active capital as long as they are earning returns that either they did not have the chance to earn before or that they could earn better returns on CoinFLEX than elsewhere.
How do we define passive capital or active capital?
Active capital is defined as capital that is deployed into crypto markets in a very high frequency type (HFT) of trading strategy. Great examples of this are the HFT market making firms that trade arbitrage strategies across multiple exchanges to take advantage of price discrepancies. Some are well known household names and others are secretive and unknown to all but the exchanges that they trade on. They remain secretive as to their strategies as if it becomes known they lose their edge over the others – this is also sometimes known as alpha leak.
Passive Capital is defined as capital from users that invest into strategies but have other day jobs that take priority over constantly monitoring and adjusting trading strategies. Examples of these could be retail users, family offices and even hedge funds.
We wanted to be as transparent as possible as to what these types of opportunities are and make them accessible to both passive and active capital so that all can make their informed choices of what they trade whether as a liquidity provider (LP) or as a taker of that liquidity.
What are the yield generating opportunities on CoinFLEX?
Automated market makers (AMMs)
AMMs have been in defi for many years but it’s really only in the last 18 months that it has grown hugely popular as a yield bearing opportunity. Passive capital realised that providing liquidity to these defi pools and being arbitraged by active capital they could still earn huge returns due to the fees they collect for providing this liquidity. Over $60bn is probably deployed in AMM strategies on DEX’s currently and it continues to grow.
We soon saw how AMMs could deploy the exact same strategy on CoinFLEX’s centralised futures orderbooks and earn even higher returns than on Defi as with futures they had a few extra advantages that meant that returns were way more lucrative:
- The use of leverage on futures to juice returns and so it makes your capital used much more efficient.
- The cheaper fees on CeFi futures meant that traded taker volumes are much higher than on DEXs. For example, on most DEX’s, for every $1 in total value locked (TVL), the average daily volume (ADV) traded ratio is about 0.7-0.8, i.e. there is less daily volume than TVL. On CoinFLEX, we are seeing 15-20X the ADV to TVL ratio.
- On chain trading has seen continuous front running by bots that see a new order waiting for on chain execution and pay higher gas fees to get ahead of that order and profit against it – also known as miner extractable value (MEV). This is not possible on central orderbooks.
The AMM product on CoinFLEX is in its early days but so far the returns have been very impressive. Unleveraged AMMs have been earning 50-150% APY and leveraged AMMs have been earning 100-500%
Building Credit Markets
Yield bearing stablecoins – flexUSD
flexUSD was launched at the end of last year and has more than $100m minted to date and is the first yield bearing stablecoin. For example it has typically paid an average interest rate of 10-12% over the last 3-4 months and is all natural yield. The yield comes from profiting from the pricing differences between spot and futures. These differences have existed in all futures markets, both traditional and crypto, and are known as basis. Basis trading has been the sole domain of active capital and about $20bn is deployed in this strategy currently on crypto exchanges.
Our repo market was the first in both traditional finance (Tradfi) and also crypto and since we launched it last year, it has traded almost $8bn in overall volumes. It is a great way for short term borrowing by traders in a safe and collateralized manner.
Due to the unique properties of CoinFLEX’s physically delivered futures and our market leading repo market, flexUSD allows passive capital to participate in generating yield from this exact same strategy that active capital has been so successful at in trading basis..
By depositing USDC and other crypto and with one click, your capital gets deployed in an automated fashion by bots on CoinFLEX. This capital is redeemable every hour as we have hourly auctions that set the repo rate that determines the flexUSD rate and also allows flexUSD holders to redeem back into their original crypto asset for no charge.
Mint flexUSD on coinflex.com/flexassets
In the current uncollateralized borrow/lend space, the centralised lender accepts deposits from lenders (say at 3% for BTC) and then lends them at 6% to uncollateralized borrowers. Uncollateralised borrowing being the fastest growing segment in crypto lending currently with over $4bn being lent out this way. These borrowers may well be hugely capitalsied and experienced trading firms but there are a few inherent problems for the lenders:
- In order to maintain a net interest margin (NIM), the centralised firm has to borrow cheap (your 3%) and lend higher (6%). On CoinFLEX, if this same borrower is paying 6%, the lender (token holder) will receive 6% as we do not take a cut of this interest or if we do eventually, it will be 10-15% of the rate (ie 60-90 basis points)
- As we are an exchange and earn trading fees from these firms, we can rebate 30% (or whatever number is chosen) of these fees to token holders, So whilst this borrower may be paying 6%, the token holder maybe receiving 20-25% if you include both the coupon and the fee rebate as total interest earned.
- As CoinFLEX is not the lender here we do not have either a single point of failure risk against a single borrower or balance sheet constraint risks as a business.
- The single point of failure is important to understand in that if a large established borrower were to default, say for a black swan event, to a centralised lender then the lender may go out of business as it will most likely not have the equity capital to absorb this loss. On CoinFLEX if one large borrower defaults, only the token holders of that particular firm’s tokens that bear the losses, which is unfortunate for those token holders but thankfully not all other token lenders across the CoinFLEX platform nor CoinFLEX itself are affected.
These are the reasons why we are totally for transparency and trust through tokenization through public order books, whether they be defi or cefi, and are a great and required way to move this market away from the mostly opaque bi-lateral practices currently seen (private chat rooms on telegram/whatsapp etc) and onto lit order books where solvency of a borrower is clearly visible in real time through the market prices of their individual debt tokens.
Buy Note Tokens on coinflex.com/notes
noteUSD is an aggregator stablecoin that invests into both these note tokens and also flexUSD. It is an easy way for token lenders to lend to a variety of borrowers so that they benefit from portfolio diversification from a credit perspective.
Mint noteUSD on coinflex.com/flexassets
FLEX DAO – Staking Yields
Creating a FLEX DAO (decentralised autonomous organisation) where FLEX Coin holders can stake and vote for product innovation and the governance of both the Cefi and Defi activities of CoinFLEX. Examples of this are like borrower credit ratings, exchange fees, buy and burn programmes. In return for staking and locking your FLEX you get rewards and these rewards (in the form of tokens) can be sold over time into other crypto or dollars.
Unlike the other forms of yield plays mentioned so far, this is much more a pure centric crypto type yield opportunity where staking has been a popular way to earn yield. By locking your FLEX Coin away in a DAO, which we have modelled on the popular Curve DAO, over anywhere from 2 weeks to 4 years you get veFLEX (similar to this), which gives you voting rights for governance and skews rewards heavily towards longer term FLEX Coin the longer you choose to lock up your FLEX.
Unlike the other forms of yield plays mentioned so far, this is much more a pure centric crypto type yield opportunity where staking has been a popular way to earn yield. You can lock your FLEX for durations between 2 weeks and 4 years. The longer you lock, the more you earn, for example 1000 FLEX locked for 1 year gives a weighting of 250 veFLEX and 4 years gives a 1000 veFLEX weighting. The revenue and profits paid to DAO stakers are paid proportional to veFLEX weightings, so longer term stakers are rewarded much more than shorter term stakers.
What does the future hold?
We are very excited about the future landscape for interest rates in crypto and truly believe that CoinFLEX is at the ground level to benefit from the huge growth in yield products & stablecoins have had in 2020/21 and will continue to do so for the foreseeable future. We would like to see:
- flexUSD becoming the de facto dominant base currency in Defi due to its 1:1 link to USDC whilst paying interest and enhancing yields in any pool that includes it.
- Growing the note token market into the biggest lit credit market in crypto where not only crypto trading firms can borrow but also any corporate or even sovereign nations.
- Building out the smartBCH chain with our stablecoin & notetoken products where scalability and cheap fees mean that retail lenders and traders can compete side by side with whales.
- Building out other AMM (automated market making) liquidity products that empower passive capital to trade as easily and as profitably as sophisticated high frequency firms (active capital).