The Rise of NewFi Banks

The Rise of Nexo and the NewFi NeoBank, OldFi vs. NewFi Banking, Market Analysis, Valuing Ethereum, & Our Crypto Recommendations

February 04, 2021

Bitcoin, Ethereum, DeFi, Blockchain, Web 3.0, and the future of moneyPublished Tuesdays and Thursdays on Substack and TelegramThursday, February 4, 2021 | Issue 8 | 586 Subscribers

Chart of the Day: The Rise of Nexo As a “NewFi” Bank

How In the World Can NewFi Banks Offer 6-8% Interest on Savings While “OldFi” Banks Offer Just 0.02%?

Some friends were asking me today in the Hive Blockchain WhatsApp Group about how NewFi banks like Voyager, BlockFi, and Nexo can pay out 6%-8% per year interest on savings while OldFi banks like Wells Fargo and Bank of America pay out 0.02% per year and often charge you to keep your money with them. Like, WTF!

It’s actually quite simple how they do it... 

  1. They pay about 6-8% per year out on deposits

  2. They take in 8-12% per year on loans

  3. They earn money on the spread and on sales of their native tokens

NeoBanks like Voyager, BlockFi, Nexo, etc. on average pay out about 6%-8% annual interest. It ranges from 0.2-10% based on what type of collateral you are putting down (BTC, ETH, USDC, etc) and other variables like whether you hold their native tokens.

But Who’s Taking Out These Loans?

Why is there demand for loans from these NewFi banks? Well, the demand comes from three types of borrowers:

  1. People who want to pay for their basic living expenses without selling their crypto, in order to stay in the market and avoid a taxable event.

  2. People and institutions who want to buy more crypto, because they believe it will rise in value. If you’re an institution, for example, you can get these cryptoasset-backed loans from Genesis Prime, which lent over $7.6 billion in Q4 2020 alone.

  3. People who see that you can earn up to 19% annual yields on AAVE and are open to taking out an 8% loan in order to earn 19% elsewhere (basic arbitrage, does come with some risk though).

Is Lending Like this Safe?

Why is this NewFi lending safe? Because the positions are over collateralized (usually 2:1) and if the price of BTC or ETH were to drop significantly (50%+), a small amount of the collateral would get liquidated, exactly proportional to what is needed to pay back the loan until the reserve conditions are met. Flippin’ brilliant, and automated, and mathematical -- unlike those loan collectors in OldFi who spend years trying to collect $15,000 in credit card debt from people who long ago realized they could game the OldFi credit system. 

Yep, it’s full reserve lending and safer than fractional reserve lending that banks do where they loan out $10 for every $1 deposited. Here, these “Neobanks” are loaning out $1 for every $2 deposited, with full on-chain collateral with immediate smart contract recourse. Like, holy wow. 

Unlike the old 2008 world of CDOs and derivatives where contracts literally lived in filing cabinets and were indecipherable, now the contracts are on the chain and are executed in real time. 

OldFi is the Real Bubble

While some who don’t get full-reserve lending say that “NewFi is a House of Cards” and is in a bubble… what’s actually happening is we are in the 1st Inning of a major capital transfer from OldFi (banks built on top of Fiat, ACH, and SWIFT) to NewFi (banks built on top of the blockchain).

The New Financial System (NewFi) is sometimes called Decentralized Finance (DeFi). DeFi is very very early (like roughly 12 months old) and growing at 30-40% per month. DeFi is based on permissionless distributed ledger technology, which is a major innovation that allows people to trust each other. Most of these DeFi tools are built on Ethereum (62 of the top 63 by total value locked have been so far), some are built on Binance Smart Chain, and some newer ones are being built on Polkadot. None are being built on Bitcoin as the Bitcoin blockchain is too slow and doesn’t enable smart contracts.

As the Valuing Ethereum report from today from Grayscale states, “Ether is the native asset underpinning a burgeoning decentralized financial system. It is used as trust-minimized collateral for lending and borrowing, and is the primary capital source for applications built on top of Ethereum. At the time of writing, there are approximately 7 million Ether locked as collateral in decentralized protocols on the Ethereum network, worth over $9 billion at current prices.”

Yep, New Blockchain Based Banks (NewFi) are going to eat OldFi for lunch this decade... it’s simply more efficient -- and is better for consumers and lenders. 

Bank of America can’t even keep my account balance updated more than every 24 hours. Because they are directly part of the Old Federal Reserve system, the amount they can pay for savings is a function of the London Interbank Offered Rate (LIBOR) which is 0.13% and the Federal Funds rate, which is 0.25%. That is their “cost of capital” in the fractional reserve OldFi system so they can’t pay out more than that. 

Let’s Compare OldFi Total Assets Vs. NewFi Total Assets

Yes, the real bubble is in the OldFi fractional reserve banking system. To illustrate, let’s compare the asset values in the top 5 global banks vs. the top 5 DeFi protocols. 

In other words, NewFi so far has around 0.12% the assets of the OldFi banking system so far (up from 0% a year ago). In a decade that should be around 30%. Only one direction to go from here… into the “supermassive black hole” that is fundamentally better crypto economics and much better designed user interfaces. 

The only way OldFi firms keep up? Well, by investing in NewFi blockchain tech and redoing their entire model to be blockchain native. The entire global and banking system is going to be rebuilt on the Blockchain, and powering it all will be Ethereum 2.0 (the base layer), Polkadot (interoperable parachains), and Chainlink (the accurate data API). 

Sort of nice to see this 5 years before most people will, right? This is why I am telling people to invest wisely NOW (not 12 months from now)... and hold for 10-15 years. This is just as big as the internet for the future of humanity and creating a better society. In 2030, we’re going to have sound money (whether it is BTC, ETH, or supply-limited CBDCs) and efficient trustworthy financial systems!

SOUND MONEY + TRUSTWORTHY FINANCIAL SYSTEMS = A BETTER WORLD

The Great Flippening of OldFi to NewFi Banking

Capital, and lots of it, will naturally flow to the better Neobanks built on blockchain tech and offering much higher yields than Fiat currency banks. The more fiat the OldFi Central Banks print, the more of it will flow to NewFi Blockchain Banks, which are simply better for consumers in every way. 

If you can get 6%-10% annual yield on your savings, with the deposits insured, why wouldn’t you transfer your savings? Yes, these amounts may decline over time as the sectors mature, but they will be way higher than the 0.02% offered at OldFi Banks stuck on the 1986-born and outdated LIBOR fiat system built upon on the 1946 Bretton Woods Agreement. 

You can sort of guess which asset class will go down and which one will go up the next 10 years.

If you see that the future of banking is decentralized and blockchain based -- then it’s clear what to do to prosper (buy and hold ETH, DOT, BTC, DPI for 10-15 years).

DPI is a index basket of LEND, YFI, COMP, SNX, MKR, REN, KNC, LRC, BAL and REPv2. You can buy it directly on Uniswap or you can just buy each of the above on Coinbase or Binance.

Remember what Vitalik Buterin’s wonderful father Dmitry said on Tuesday... 

Here’s a Real Life Example With Nexo - A NewFi Bank

On Nexo, a DeFi NeoBank based in London, anyone can borrow at 11.9% per year and earn 8% annual interest on any any digital assets you deposit and hold with them. Crypto Deposits are custodied automatically by BitGo and insured up to $100,000,000 by Lloyds of London (which sure beats the FDIC’s $250k). Nexo is backed by $52M of capital from investors like Arrington XRP Capital.

Nexo has over $4B in Assets Under Management (AUM) so far and over 1 million users on their platform in over 200 countries.

As a major benefit to token holders, if you hold 10% of your portfolio in NEXO tokens, then you can borrow at 5.9% per year and earn 6% annual interest on crypto and 10% on fiat. That means you can borrow for less than the interest you can make on deposits. 

While this sounds impossible mathematically, the nuance is that you don’t earn interest on the crypto that is collateralizing any outstanding loans, only on the value in your savings wallet (what isn’t being used to collateralize the loans).

  • That said, getting 6% annual interest for holding Bitcoin or Ethereum in my Nexo wallet is absolutely fabulous. 

  • And being able to get 5.9% loans in four minutes (without any paperwork) right into my Nexo account for buying more crypto (or Fiat OldFi bank account for other living expenses) also sounds great!

Dividends to the NEXO Token Holders Generate Cash Flow

The last thing I’ll say about Nexo is that their token NEXO has appreciated by 784% in the last year. So you’re not buying a worthless token to juice your interest-rate returns. Nexo gives 30% of their profits to token holders, creating cash flow and intrinsic value. They pay out every August.

There are 560 million NEXO tokens. They will likely have around $20M in profits to disburse this year. That means for each $1.25 token you own, you’ll get $0.04 in annual dividends… (woopty doo, an extra 3% annual return). However the real value isn’t in 2021, it’s in 2031.

Imagine when Nexo has $5B in profits to distribute to say 600,000,000 tokens (Bank of America had $16.2B in profits the last year) and suddenly for each $1.25 token you bought back in 2021 you’re now getting $8.33 per year. Now we’re talking.

If you for example, bought 5000 NEXO tokens for around $7000 now (and my profit projection above holds true, lots of assumptions there of course), you’d be making $41675 per year extra by 2031. Even it were an extra $7000 per year, I’d be happy with that!

Of course, by then the tokens will be worth much more (maybe $250 per token), so it’s probably a good idea to buy some now if you think NewFi Banks are the future.

How’d I come up with $250 per NEXO token? Generally speaking in the long term, assets are worth about 30x their cash flows (and more if they are growing quickly, look at TSLA and AMZN). So if Nexo can generate $16.67 per year in dividend cash flow it will be intrinsically worth around $250 per token. Not a bad potential appreciation for a decade. Yes, I do believe this is the future of banking.

Nexo has paid out over $9.4M in token dividends so far ($6.1M in 2020 alone, up 154% from $2.4M in 2019). So you’re buying a token that is going to increase in value as Nexo has greater cash flows. Imagine if Bank of America gave out 30% of their profits to Bank of America customers. Yes, NewFi is here. Yes, we’ve been waiting for these banking innovations for 30 years. Yes, the future is now.

Will it be Nexo that wins big, or will it be another competitor with a similar model. I don’t know yet. But I know Nexo is on to something really big… they (along with Voyager) are the first to come up with a consumer-friendly user experience. Read the Nexo whitepaper here to learn more.

Now all we need is for these NewFi banks to get on the rails of the ACH/SWIFT protocols too and we’ll have everything we need in one place for global payments for corporate and personal banking where the customers get part of the profits. 

What’s Your Estimate… NewFi Pop Quiz

If today...

Then, how much will the top 50 NewFi assets have in Total Locked Value in ten years from now on on February 4, 2031?

Your guess _______________________?

My guess? Oh, about $20 Trillion (600x) more than now.

Thursday Market Analysis

  • Since our publication of our Bitcoin vs. Ethereum: Who’s The King chart on Tuesday, Ethereum’s price is up 6.5%, rocketing past it’s previous all time high of $1460.

  • On Wednesday and Thursday, Michael Saylor’s has been hosting an online event for CEOs and Institutional buyers called “Bitcoin for Corporations,” sharing his playbook for adding Bitcoin to the balance sheet as an inflation hedge and diversification strategy away from fiat (which loses value each year). Saylor’s thankfully bringing everyone into Bitcoin, then 2 months later they tend to figure out that Ethereum is a much more advanced technology and way more useful as a platform for building apps.

  • Here’s how it usually goes as technologically competent Tech CEOs and CFOs fall down the Bitcoin rabbit hole…

    • Month 1: Oh wow, Bitcoin is a thing -- it’s digital gold. Like gold, but 10x better.

    • Month 2: Oh wow, Ethereum is a thing -- it’s powering the new financial system. It’s way more capable than Bitcoin. 

    • Month 3: Oh wow, DeFi is a thing - it is the new financial system of the world and replacing OldFi (the old financial system of the world).

    • Month 4: Wow, Ethereum powers 62 of the top 63 DeFi apps and is going to eat Wells Fargo, Goldman Sachs, and Robinhood for lunch in 3-5 years. It might beat Bitcoin in market cap by the end of this decade if ETH 2.0 goes well.

    • Month 5: Wow, it’s time to get some Ether on our balance sheet so we can compete in the 2020s in the new decentralized computing platform.

  • And there you have it… by 5-6 months from now your Ether (ETH) investment should be looking pretty good!

Report of the Day: Valuing Ethereum By Grayscale

Earlier today, Grayscale published a well-written research report called “Valuing Ethereum” that describes how to apply common sense intrinsic valuation based on fundamental analysis to Ether (ETH). Long story short: The net out is very bullish for ETH investors. Here are some of the excerpts from the report…

  • “Notably, total transaction fees during January 2021 were nearly 5x the peak fees of January 2018. Yet, Ether’s price is approximately equal to that of the 2018 peak.”

  • “Ethereum 2.0 will transform Ether from a commodity to what we might describe as a productive commodity — holders will be able to generate interest by staking Ether. This asset structure is unlike anything else in the physical world. Commodities are consumed. Equities provide rights to cash flows. Under Ethereum 2.0, Ether can be consumed as a commodity or staked as a claim on cash flows, similar to equity.”

  • “Between the enormous amount of activity on Ethereum, the economic improvements to Ether, and the promise of increased scalability with Ethereum 2.0, there is a lot for the Ethereum community to be excited about. We can observe from the data that the price of Ether tends to move with underlying activity on the network. As noted throughout this report, multiple metrics are reaching new highs, including active addresses, hashrate, and network fees – a positive sign for investors.”

  • “Ether is the native asset underpinning a burgeoning decentralized financial system. It is used as trust-minimized collateral for lending and borrowing, and is the primary capital source for applications built on top of Ethereum. At the time of writing, there are approximately 7 million Ether locked as collateral in decentralized protocols on the Ethereum network, worth over $9 billion at current prices.”

  • “In many ways Ether is functioning as new-age digital money on the Ethereum network. Anytime a user deploys a smart contract on the Ethereum network, provides liquidity to an application, or makes a trade on a decentralized exchange, Ether is necessary to pay network fees.”

  • “Ethereum plans to implement a proposal known as EIP-1559. Among other things, this proposal would burn (or destroy) Ether that is used to pay for transactions. This is important because it would transform Ether from a medium of exchange asset to a consumable commodity. Ether would become more like combustible gas than money.”

  • “If this proposal (EIP-1559) is implemented, it would also ensure that Ether is the native economic unit on Ethereum – protocol rules would dictate that only Ether could be burned. This would reduce the possibility of economic abstraction – the ability to pay fees in an asset besides Ether. This burning method may also serve as a deflationary mechanism if the Ether consumed as fuel outpaces the issuance schedule. If activity increases and the supply of Ether decreases due to burning, a supply and demand curve would indicate an increase in the unit price of Ether because each unit would need to satisfy a greater proportion of economic activity. If EIP-1559 is implemented, it would institute a consumption mechanism that should serve as a positive feedback loop for Ether’s price.”

  • “In a similar vein, hashrate on Ethereum, which measures the amount of computer power miners are using to validate transactions, is reaching new highs. Because it takes time for miners to recoup their initial investment, this is a sign that miners are confident that Ethereum will continue to generate high transaction fees. If miners felt that transaction fees would decline, they would be less willing to allocate resources to mining.”

Key Chart: Ethereum Undervalued Based on Transaction Fee Ratio

My Crypto Recommendations (Updated from Tuesday)

Here are my big picture recommendations for anyone getting started in crypto investing. I adjust these each week or so based on what I learn and any changes in the marketplace.

  1. Never invest an amount you can’t afford to lose.

  2. Be careful investing on borrowed money (margin). We don’t recommend it until you’re a professional. Roughly speaking, if you borrow 100% of your portfolio value (1x leverage) and the crypto you’re holding drops 50% which often happens, you’ll be wiped out and be back to zero. Remember that the first rule of making money is to not lose money. 

  1. Unless you’re an experienced and professional trader with many years of training, your best bet is to buy and hold for the long term (10-15 years) and not attempt to time the market. If you are going to attempt to time the market, be very familiar with the Stock to Flow model and the timing of BTC halvings and be very familiar with the research backing up the blue chips like BTC, ETH, DOT, etc.

  2. We recommend Coinbase for those investing small amounts (<$10K) and the lower fee Coinbase Pro, Gemini, Binance, or Kraken for those investing larger amounts ($10k+). You can also use the no-fee Voyager or Nexo which give you no commission trades in exchange for holding your cryptodeposits. 

    1. Certain tokens don’t yet trade on Coinbase. Binance has most of them. Uniswap has most anything Binance doesn’t have. 

    2. Track market caps here.

    3. You can see which blockchain tech is getting the most transactions fees here.

    4. You can do your research here and here.

  3. For a mix of long-term capital preservation and growth, we recommend keeping 33% of your holding in BTC, 33% in ETH (“The Blue Chips”), and around 33% in up-and-coming blockchain tokens (<$100B market cap). For the alternative asset exposure, here’s what we like (the 10 we like the most are bolded):

    1. We like these blockchain techs: DOT,KSM, ADA, ATOM, SOL, HBAR

    2. We like these NewFi Banks: NEXO, VGX

    3. We like these DEX Exchanges: UNI, SUSHI, 1INCH, BURGER

    4. We like these DeFi protocols: AAVE, COMP, SNX, YEARN, CRV, BAL, REN, CAKE

    5. We like these Oracles: LINK, BAND

    6. We like these Web 3 Tools: THETA, GRT, FIL

    7. We like these Insurance Tools: WNXM

    8. We like these Payment Platforms: EGLD, XLM, CELO

The People We’re Following Closely on Twitter

If You’re Just Getting Started With Crypto, Start Here

The Coin Times: Tracking the most important blockchain stories of the 2020s including a decentralized internet and the creation of a new open global monetary system that works for everyone. As always, published for informational purposes only. Just my opinions. Not intended as financial advice. At the time of publication, we are long on nearly everything we write about as we believe in it. Please do your own research. Published 2x per week. Published by Ryan Allis.

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