NEXO TOKENOMICS
Some of you will be surprised to see me write about a Centralized platform. I think most of us start our journey on one CEX or another though and for the less technical-savvy, centralized platforms will often be the end of their journey. Many will never manage their own wallet and unless they see a Defi button on Coinbase they will never have an inkling of what they’re missing. I literally would not trust my own mother to manage her private keys. So, let’s consider for a moment something useful to a wider audience and which just might tease them with a glimpse of just how badly they have been exploited by the banks.
Platform Basics
At its core Nexo is just a money market like Compound or Aave. They take customer deposits and loans them out in various ways. Most of their money is made lending to people playing with leverage on exchanges via their prime brokerage service. Yes, they sometimes do other things with the money but one of the first questions people ask when I tell them they can make 10% APR is “who is paying for that”? The main answer for Nexo is institutional borrowing and the highest demand for that is for leveraged trades. Other answers include people borrowing on the main Nexo platform, liquidity farming (yes they use Defi with your money), and eventually credit cards with credit lines secured by collateral on their platform.
The main thing I introduce people to this platform for is to use Nexo as an alternative to a high interest savings account. Right now the banks make all the money your money makes. In an environment with 5-7% inflation, if you’re making <1% in your savings account while the bank makes 5% on mortgages you’re just being exploited. Nexo stablecoin lending offers sanctuary from price volatility without being eaten alive by inflation. Crypto is not known for being a safe-haven from equity price risk but here it is nonetheless. Stablecoins are absolutely where I’d start most people in this space. There is a magic moment the first time someone sees interest hit their account that no amount of writing from me can ever replicate. It suddenly becomes less abstract, more visceral. It defies all their expectations about crypto and helps to establish that clean slate they need before they start down The Rabbit Hole.
Even once you are well down The Rabbit Hole though platforms like Nexo can still play an important role for risk diversification in your portfolio. If your wallet is compromised, with how your money is deployed right now, do you lose everything? Do you actually separate your assets into hot and cold wallets like Nexo does? Do you have insurance on that hot wallet like Nexo does? Does your wallet offer 3 day timelocks on sending ERC-20’s to new addresses so you have time to respond to an attack? What’s your password recovery story if your ledger is damaged, your forget that pin, or simply mis-key it three times? I’m well aware of all the high profile hacks of centralized exchanges over the years. “Not your keys, not your coins” remains true despite the above. However, I would wager there have been more assets lost in total due to poor wallet hygiene, lost private keys, people posting their private keys to scammers, and people simply misusing contracts like by sending wETH to the contract address than by hacks of centralized platforms. The difference is when your and my wallet get compromised, it doesn’t make news.
You can’t buy insurance on Nexus mutual for risk of that type. So what can you do? If you’re willing to you can split your assets up into multiple wallets but realistically you’re likely to end up sacrificing wallet hygiene for convenience eventually and using a paper Metmask wallet if you do this. You can (and should) send small test transactions before moving large sums of money but gas is gas… and sometimes you won’t (I forgive you). Centralized platforms like Nexo offer another sensible alternative so that you don’t lose everything if the unforeseeable happens. In my case, I have enough divided amongst centralized platforms that unless both my wallet and these accounts are compromised I’ll always be able to get back everything I’ve invested in crypto. At the same time, the loss of any given platform won’t set me back more than a year of interest. That is an entirely different type of risk diversification than I often see talked about.
Platform Risks
Second, there was some drama with the founders related to their previous Credissimo enterprise. I won’t go into the details here; suffice to say it’s been a few years since anything troubling has actually occurred. Overall, the Nexo subreddit is a much more positive place than say… Coinbase or Kucoin. Nexo is slowly building legitimacy the hard way, one customer and day at a time.
The insurance on the hot wallet is only about $375M but the hot wallet contains about $1B in assets. By ratio that’s more insurance than any wallet I own, but you shouldn’t be under any illusion that all the assets you deposit there are insured.
The NEXO Token
So let’s say that, knowing these benefits and risks, you’d like to put a small share of your crypto portfolio to work on Nexo. Should you, or should you not, buy the NEXO token as well? Here are the basic benefits of holding the NEXO token as a lender of stablecoins.
- It increases yield by 2% if you back your assets by 10% NEXO. For every $1k of assets deposited, you’ll need another $100 in NEXO to get the maximum yield. You may want to have some buffer here for price variations in the NEXO token.
- If you opt to “Earn in NEXO” you get an extra 2% APY. You can continuously sell it on their local exchange and still come out ahead so I see little reason not to do this.
- You can either earn 7% on Nexo you hold and use it to borrow more stablecoins at 0% APR for up to 20% LTV or you can lock it with a fixed term for up to 12% APR which matches your stablecoin lending rate.
As a practical demonstration let’s say you have $11k you’d like to invest. You have two options, depending on the amount of faith you want to place in the NEXO token price:
- You place no faith in the NEXO token price. You deposit your $11k as DAI into Nexo. You make 8% APY. That’s $880 per year. Compared to Compound offering 2.5% you’re already doing pretty well. You’re also beating inflation which is quite a feat by Tradfi standards. Congrats.
- You believe the NEXO token price will basically retain value. You buy $1k NEXO and invest $10k DAI. On the 10k DAI you earn in Nexo so you earn 12% APY. That’s $1200 per year on your $10k DAI, $320 more than option 1 before we add in interest on the NEXO itself. You then lock your $1k NEXO for 3 months which gives you 9% APR on your $1k NEXO. If you continue this, that’s another $90 in profit on your NEXO for a total of $1290 per year.
- This is not an inflationary token. For them to pay it out in dividends, it’s either coming from their reserves or they are buying it. That’s actually refreshingly rare these days and removes the single biggest cost most governance tokens today face.
- As the price falls investors are incentivized to buy more NEXO to retain their 10% backing. This should give the token reduced downside compared to BTC just given how much of their AUM is known to be in USD equivalents.
- There is an ongoing buyback program. There is another guaranteed $50M of buy pressure coming this year on an asset with a $1.2B market cap. That alone gives this token a ~20 PE.
- Their platform growth numbers look solid. You can see data from their on-chain stablecoin loans here. That chart is an incomplete picture, but it certainly isn’t bearish. The platform is growing, and that growth reduces the downside potential.
- While official AUM numbers are not posted on their website, we do get the occasional official number from interviews like this one. That puts AUM at $15B. While this doesn’t distinguish between lending AUM and borrower collateral it does give us some indication of platform size. NEXO should be worth at least 10% of the lending platform AUM just for the rational case above, but it also has benefits to borrowers that I haven’t stated. In total the approximate fair market cap of NEXO is about $1.5B if everyone is just being rational and maximizing their returns. It’s currently at about $1.2B. Being below the rational fair market cap also limits further downside risk.