A CEFI Risk Analysis

A CEFI Risk Analysis



If you consider this article investment advice, also consider having yourself committed at a mental asylum.





"I have LINK on nexo and an outstanding loan I've yet to pay back. How will a mass LINK withdrawal from nexo affect me? I don't see how it would affect my stack. Doesn't seem like there's a chance of being liquidated here in any case. If Nexo can't pay my yield in LINK and has to pay in something else, I'm fine with that. What am I missing?"

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The only small chance of occurring, but real risk is that they'd trade your LINK for tether or some other coin under the market value of LINK.
So example, in an actual fall out; worst case scenario.
You have 1000 LINK in CEFI. Maybe LINK staking or whatever big whale play happens and supply is completely gone. Since its CEFI you're not locking up LINK in a smart contract ensuring that the asset is tangible and real and easy to exchange back. On CEFI everything is on paper but they don't have to guarantee you that they have the tokens, as said in their terms of service for all centralized traditional banks/investing platforms.
You may get a situation where they trade your 1000 LINK for 23000 USDC.


Now, you may be ok with that but what if because of this LINK liquidity crisis that the price starts going immediately to 40 dollars.
You may panic and desperately want to buy the LINK while its going up because you're stuck with USDC. But wait, since its a CEFI you may be limited to only being able to pull out 10,000 USDC a day or you have a 2 hour transfer period. So now you sit there, and its climbing and rocketing; while you only have 23000 USDC. When you finally get your USDC and want to exchange it for LINK you see that LINK is now priced at 52 dollars again. So now that 23000 USDC gets you 442 LINK.


Its a low chance this sort of event would occur but its very real and very possible. And if you don't care then just know that any coin, not just LINK, that gets supplied a lot into collateralized loans will be targeted for yield farming to pay those above average APYs on CEFI platforms.
I just like talking about where these yields are coming from because since its so new, a lot of people are being advertised to put their coins into cefi on social media without really knowing what is occurring behind the scenes.

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Anyone who has used defi should know that the amount of fees generated isn't really that high. At most you'd get perhaps 1%. A lot of protocols funnel your money into yield farming to sell at the market then use those gains to give you part of the money. This gives you a higher return but with a higher risk.
Then you have something like what you see here in the image, where they can get you a 150% APY but they'll use your funds to algo trade on cexes. Which... includes longing and shorting coins.

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TheCryptokeeper
TheCryptokeeper

cryptocurrency investment analyst, meme wizard and link marine. some know me as @UwUGuy777


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