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Why Liquidations Are Needed In Crypto

Published

5 years ago

April 16, 2020

If the current COVID-19 pandemic has exemplified one thing, it is that our individual actions might have dire consequences for all of us. Unfortunately, human nature propels the majority of humankind to put their individual interests first and it truly takes a severe crisis to open up our eyes to the interconnectedness of everything.

Of course, the crypto markets and the blockchain space are not resistant to the general forces that rule everywhere else. The unprecedented meltdown of prices across crypto assets with BTC shedding as much as 47% of its value intraday on March 12–13, 2020, calls for a rigorous analysis of the most recent events and an explanation on how Nexo did what it had to do to protect its customers.

It is through assessment of real-life stress-testing that the blockchain industry’s collective immune system develops the necessary resilience and this is of the utmost importance as the world’s total unpreparedness for the COVID-19 threat clearly showed.

This post examines the crypto lending space in which Nexo takes a prominent place but the conclusions can be projected to any asset-based lending business and any financial institution throughout the world.

Crypto Lending 101

Any significant crypto lender has two major lines of business:

1. Crypto-backed lending — clients deposit crypto assets as collateral with a crypto lender in order to receive a loan. This happens without any credit checks, as the loan is secured by the underlying collateral.

2. Earn interest products — clients add funds to their accounts with a crypto lending company in order to earn interest on their idle assets.

While some companies might use the funds received on ‘Earn Interest’ products for a myriad of trading strategies and directional bets on the market, the general case states that a crypto lending institution should be using the funds received from ‘Earn interest’ products to finance crypto-backed loans for their customers.

Knowing what the company that you are entrusting your hard-earned cash with is doing and how it protects your assets makes all the difference for your financial success, especially during times of immense volatility.

At Nexo, we are completely transparent as to what we do with the funds clients are earning interest on — we finance crypto loans secured by 200–500% of collateral.

The reason we are the financial institution of choice for crypto-backed lending is simple: Nexo has developed fully automated lending and collateral management capabilities that can handle a large number of loans with near-instant execution in 200+ jurisdictions around the clock. The fact is that automated online credit facilitation is no simple matter, and we have been doing it successfully for more than 13 years now. We believe this is the main differentiating factor and reason why more than 650,000 users entrust Nexo with their assets.

Let’s Talk about the Elephant in the Room — Liquidations

Nexo

It is our hope that you, a savvy enough individual to take an interest in crypto, someone equipped with the mindset to encompass the crypto lending business model in its entirety, will appreciate the fact that an enterprise such as Nexo is at all times protecting the interests of both the borrowers and the people funding the loans, i.e. those earning interest on their assets.

Let us unequivocally state: We do not enjoy liquidating clients as this brings them great distress and there is nothing we like to see less. Nexo’s revenues and NEXO Token holders’ dividends are generated by the interest our clients pay on their loans, therefore liquidations go against the very essence of our business and token models as they shrink the loan book and reduce revenue.

Still, we have a fiduciary duty to everyone involved with Nexo. Considering that there are no credit checks for our products, the collateral that borrowers pledge in order to receive a loan is what guarantees the funds of those clients earning interest on their assets. The entire Nexo loan portfolio is overcollateralized by a factor of 200–500% which is what makes Nexo’s ‘Earn Interest’ product arguably even safer than banking deposits which guarantee funds only up to €100,000 in the EU, and only up to $250,000 in the US. It is important to note that Nexo’s protection mechanisms apply to any amount and are not capped.

Consider these two types of entities:

1. An institution that transparently says to its loan customers — “if the collateral backing your loan drops below a certain point and you do not add more collateral or repay part of your loan, we will need to automatically liquidate your assets in order to ensure that the people who have funded your loan do not lose their funds”

VS.

2. A company that takes no interest in price volatility and tells its loan customers that they can take their time to top up their collateral or repay their loans, as there will be no liquidations in the meantime even when the collateral becomes insufficient to cover their outstanding loan.

Would you ever consider entrusting any form of money to the second company? Of course, you would not.

If for some reason you still decide to place your funds with them, imagine the following scenario: A borrower takes a $100,000 loan against BTC but the price of BTC drops and the collateral is now worth merely $20,000. This loan is entirely funded by your money. How incentivized do you think the borrower would be to repay the loan at all and how protected would your savings be?

The truth of the matter is that a crypto lending company that does not issue price-based margin calls and does not liquidate collateral automatically most probably does not have working collateral management and

liquidation engine systems at all. Not liquidating collateral efficiently and on time for loans that are underwater is basically betting the entire enterprise and by extension, all the customers’ funds. Masquerading the lack of liquidations as an act of goodwill towards its clients would be audacity of the highest caliber, as it is quite simply making a risky bet on the price of crypto assets. In the instance of March 12–13, 2020 such a bet worked out as the market quickly recovered. But had prices continued to decline, the company and its clients would have been wiped out at even lower prices.

Why Does Nexo Care If Another Company Blows Up?

make your own cryptocurrency

For a number of reasons — predominantly because we are taking the long-term view and do not want people in our still nascent industry to lose any of their assets. And without price-based liquidations of collateral, this is bound to happen sooner rather than later. Аs anyone who has ever visited a casino knows all toо well — play long enough and you will lose everything. The free drinks equivalent of the casino in our example above are the few percent of interest that are being “paid back to the community” by such companies in order for them to keep on making risky bets with your hard-earned assets until the bubble blows up.

Unlike traditional financial markets, where bailouts by governments might reduce some of the systemic risks, the ramifications of such a blowup in the crypto space go well beyond just the individual losses — they are detrimental to crypto lending and the entire blockchain community. It gives legislators, politicians and those failing to recognize the benefits of distributed ledger technology further excuses to stifle innovation and to prevent the mass adoption of crypto by pointing out the deficiencies and the foul play of irresponsible actors. We have seen this time and again with every instance of something going wrong in the crypto space.

If the blockchain space and crypto finance are to grow beyond being a boutique, niche industry of a few hundred billion dollars, all major drivers of the space need to adopt proper fiduciary governance and the space needs to institutionalize. Only this will ensure a large influx of people coming to realize that in light of the money printing bonanza and the distorted market principles that proliferate our economies today, crypto is part of the possible solution to not only preserving your current wealth but managing and growing it.

Disclaimer: This is a sponsored post. Readers should do their own due diligence before taking any actions related to any company, product or service mentioned in this article. BitcoinAfrica.io is not responsible, directly or indirectly, for any loss or damage caused by or in connection with the use of or reliance on any content, product or service mentioned in this post.

Related Topics:COVID COVID-19 Crypto Lending NEXO

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Problems Nigerians Face With Bitcoin and Cryptocurrencies

Published

2 years ago

May 31, 2022

Guest Contributor

Nigeria is ranked as Africa’s largest country with the most crypto traders and ranks third globally. The country accounts for the largest volume of cryptocurrency transactions outside the United States. In the last six months, it has been recorded that about 35% of the Nigerian population has traded cryptocurrency.

As encouraging as these numbers may be, Nigeria, as an environment, has been very unfriendly to cryptocurrency and its related aspects. Last year, the Central Bank of Nigeria ordered all commercial banks and lenders to stop transactions or operations in cryptocurrencies, citing a significant threat to the country’s financial system.

The ban on cryptocurrency in Nigeria was big negativity to the Nigerian youth, especially knowing that over 50 million of the population are involved in cryptocurrency. During this time, a lot of crypto trading platforms were shut down in the country. Also, many bank accounts suspected of dealing with cryptocurrency were locked, including their funds.

Even today (as of May 27, 2022), any bank transaction with a description or notes of “crypto,” “bitcoin,” “P2P,” or any crypto-related words will be locked away alongside the account(s).

The unfriendly treatment of cryptocurrency in the country is alarming. In the plight of making a positive solution, the community led to adopting systems where crypto traders could trade cryptocurrency without involving the bank.

How Breet Solves Some of the Issues Nigerians Face in Cryptocurrency

Breet is an OTC crypto exchange platform that allows users and businesses who simply want to receive crypto and get a flat equivalent of their coin to convert their crypto to cash money immediately.

Breet App

With Breet’s over-the-counter system, you are saved from the hassle of boring explanations of what and how crypto works and tedious illustrations of cryptocurrency market charts. Breet enables users to securely convert and withdraw their crypto coin to cash money in less than five(5) minutes without the use of peer-to-peer trading or any third-party agent.

Breet is a revolutionary new way to convert and withdraw your crypto coin without the need for peer-to-peer trading or any third-party agent. With just one click, you can have cash money in hand within five minutes.

With Breet, you can sell your cryptocurrency in less than 5 minutes. This is an incredible feature on its own, meaning businesses can now accept cryptocurrencies as payment options without having their customers wait for hours to confirm payment.

Breet is also completely free. There are no hidden charges, no withdrawal fees, no processing fees and no receiving fees. There are zero charges with Breet. Breet’s free usage solves the issue of high and inconsistent charges for many Nigerian crypto traders.

Breet

There is no limitation to how much you can receive or withdraw on Breet. You don’t have to have about 10,000 Naira worth of cryptocurrency before you can withdraw. You can even withdraw as low as 100 Naira with Breet Exchange.

Breet is simple, free and certified. There is not much sugar coating to tell before believing that Breet is, arguably, the best crypto trading platform in Nigeria currently. The incredible reviews on the Breet app give perfect evidence.

What more do you need? If not, a crypto exchange that makes crypto transactions easy and makes people happy. You should become a Breet user by downloading Breet mobile app available on all Android and iPhone devices.

Remember being a crypto trader in Nigeria can be challenging. This is why it is important for you to learn more about cryptocurrency and the latest news by doing your own research.

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Ethereum Timeline: Shift to Proof of Stake

Published

3 years ago

April 27, 2022

Guest Contributor

The much-anticipated transition of the Ethereum network from proof-of-work (PoW) to proof-of-stake (PoS) consensus is finally taking place. The adaptation of PoS has always been the plan and a vital part of scaling Ethereum by future upgrades. However, abruptly shifting to PoS can pose significant technical and community challenges that are not as simple as using PoW to achieve network consensus. Having said that, what exactly are PoS and PoW?

Proof of Work

Proof-of-work (PoW) is a consensus algorithm that allows for the secure, decentralised verification of transactions on a blockchain. In a PoW system, miners are responsible for verifying and committing transactions to the blockchain. During the verification process, miners compete against each other to solve complex cryptographic puzzles. The first miner to solve the puzzle is rewarded with cryptocurrency, and the transaction is added to the blockchain.

Reasons To Shift From Proof of Work

The Ethereum ecosystem has evolved at an astounding rate in the last year. This growth was primarily due to a significant emergence and explosion of NFTs and Decentralised Finance (DeFi) initiatives. While the change-over was imminent, some factors to be considered for the same are:

The PoW consensus protocol requires users to utilise significant computational power to validate transactions and add new blocks to the network.
Users who devote their computational resources to the shared ledger are miners.
These miners are rewarded with Ether tokens in exchange for the computing power they have supplied to the network.
With PoW consensus, Ethereum takes up to 113 terawatt-hours of electricity in a year. According to Digiconomist, it is more than the total electricity consumption of the Netherlands per year.
The current Ethereum transaction with PoW consensus takes up energy equivalent to the consumption of one week of energy of an average US household.

With so many downsides to its cap, PoW has many advantages, which is one of the main reasons it has been a reliable consensus for so long. The PoW consensus has been robust and secure all these years. But the consensus can be utilised by a cryptocurrency with a massive valuation and relatively simple use case, such as the bitcoin. With the amount of energy and power involved, it becomes difficult for individuals to meddle with a high valuation asset.

Proof of Stake

The consensus protocol Proof-of-stake (PoS) has been introduced to address the issue of over-mining. Proof of stake (PoS) is critical to understand because it could eventually replace the proof of work (PoW) consensus mechanism that is currently used by most cryptocurrencies.

“PoS is a way to achieve decentralised consensus without using energy-intensive mining. It is an alternative to the more common proof of work algorithm. With PoS, a cryptocurrency’s blockchain is secured by its token holders who are required to lock up their tokens as stake and not by miners equipped with powerful hardware. It’s an energy-efficient, cost-effective and therefore, a popular choice for crypto giants like Ethereum,” states Dev Sharma, CEO of Blockwiz, a crypto marketing agency.

In contrast to PoW, in which the individual who completes the mathematical proof first is rewarded with new coins, with PoS, no new coins are created.

Benefits of Proof of Stake Consensus

Proof-of-stake introduces several enhancements over the PoS mechanism:

Improved resource proficiency – you don’t need as many energy mining blocks.
Minimal entry barriers, lower hardware requirements – Even if you don’t possess top-tier hardware, you still get ample opportunities to participate in the creation of blocks.
More excellent resistance to centralization – PoS would imminently facilitate the generation of more nodes.
Staking facilitates the operation of a node. It does not necessitate significant expenditure on equipment purchases or resources, and if you lack the ETH token to stake, you cannot participate in staking pools.
Staking consensus enables reliable sharding. Shards enable Ethereum to generate new blocks simultaneously, leading to enhanced throughput of transactions.
In a PoW mechanism, sharding the chain would reduce the amount of energy required to modify a particular network section.

In a Nutshell

Proof of stake (PoS) is a type of algorithm used by cryptocurrencies to determine who gets to create new blocks on the blockchain. PoS works by requiring users to lock up some of their currency in a smart contract called a stake. In return, they are given the right to validate blocks on the network and earn rewards.

The advantage of PoS is that it doesn’t require the massive energy consumption that PoW does. This non-dependency on massive energy utilisation makes it more environmentally friendly. It reduces the risk of centralisation since few users would be able to control the majority of the currency. Therefore, it’s no wonder that Ethereum is making the much-anticipated switch.

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Amber Group March Recap 2022: Here’s What Happened

Published

3 years ago

April 14, 2022

Guest Contributor

Amber Group News Named one of CB Insights’ 2022 Blockchain 50, an annual ranking of the most promising blockchain and crypto companies in the world.

Announced the appointment of Ehsan Haque as the General Counsel for Europe, Middle East, and Africa (EMEA) region.

CEO Michael Wu was selected as a recipient of the “Top 100 CEOs in Innovation Award 2022” by Word Biz Magazine.

Product Development and Partnerships

Amber Group Partnerships

Participated in Mina Foundation’s token sale, EthSign’s seed round, and Zecrey protocol’s angel round.

In the News

Michael Wu CEO Awards

World Biz Magazine: Michael Wu, CEO of Amber Group – interview WBM Top 100 Innovation CEO.

CNBC: For crypto to be adopted globally, we will have to comply with regulators: Crypto-trading platform.

Bloomberg: Bankers Who Stay in Hong Kong Are Rewarded With a Pay Bonanza.

Economist: EthSign raises $12 million in stable coin led by Sequoia Capital India, Mirana Ventures.

Forkast News: From crisis currency to consumer adoption: What next for crypto?

CoinDesk: Mina foundation raises $92M to accelerate adoption of Zero-Knowledge Proofs.

Cointelegraph: If the glass slipper doesn’t fit, smash it: Unraveling the myth of gender equality in crypto.

AMBCrypto: Amber Group strengthens management team with Ehsan Haque as EMEA General Counsel.

CoinCu: Zecrey protocol has raised $4M in an angel fundraising round.

Chain Debrief: Is the user experience in DeFi bad? Opportunities, challenges and how to see growth in DeFi.

Medium: Reproducing the $APE airdrop flash loan arbitrage/exploit.

Medium: Non-fungible trends.

Events and Media Appearances

Michael Wu

CEO Michael Wu joined Forkast News to discuss crypto’s consumer adoption and what’s next for crypto.

CEO Michael Wu joined CNBC Street Signs Asia to share how Amber Group seeks a balance between regulation and crypto development.

CEO Michael Wu gave an interview with Economist Impact at Technology for Change Week on how to stay ahead of the curve in the fintech space.

Managing Partner Annabelle Huang joined Economist Impact’s Asia Trade Week to discuss the future of crypto as payment in Asia.

Managing Partner Annabelle Huang joined Avalanche Summit to discuss the opportunities and challenges in DeFi.

Managing Partner Annabelle Huang joined Goldman Sach’s panel discussion on “Digital assets – Investing in the future” to celebrate International Women’s Day.

Annabelle Huang

Managing Partner Annabelle Huang gave a guest lecture on DeFi and Web3 for the International Finance class at Singapore Management University.

Managing Partner Annabelle Huang joined the DIG FIN VOX podcast to talk about Amber Group’s move to Singapore and into retail.

CSO Dimitrios Kavvathas joined Blockchain Africa Conference 2022 to discuss institutional investment in crypto.

CSO Dimitrios Kavvathas joined FinTech Festival India at a panel discussion on “De-Fi – A better solution for peer-to-peer lending”.

CSO Dimitrios Kavvathas joined the World Blockchain Summit in Dubai at a panel discussion on “Fostering the global crypto ecosystem”.

Dimitrios Kavvathas

Europe Managing Director Sophia Shluger delivered a keynote speech on digital wealth at Blockchain Africa Conference 2022.

Europe Managing Director Sophia Shluger joined the CryptoCompare Summit in London to discuss the building blocks of the new digital economy.

Europe Managing Director Sophia Shluger joined the FundFocus Europe 2022 conference to discuss the foundation for the widespread institutional adoption of cryptocurrency.

Sophia Shluger Rear

Latin America Managing Director Nicole Pabello joined the Ethereum Rio conference to discuss the LATAM Ecosystem in the world.

Nicole Pabello

Institutional Sales Director Justin d’Anethan joined EmergentX’s Annual Digital Asset Summit to discuss the institutionalizing of the digital asset industry.

Justin d'Anethan