NEXO: a dividend paying security token

  • Borrowers: 1/ get a loan against crypto, 2/ hold nexo tokens to pay lower interest when using nexo as collateral or as repayment of a loan, 3/ hold nexo token to profit from an increase in value
  • Lenders: 1/ get higher interest and lower risk vs competitor platforms, 2/ hold token as a passive investment based on dividend yield
  • Nexo the company: 1/ grow loan book, 2/ grow the value of its own tokens. There is one scenario where the founders’ interest is not aligned with token holders’. If the founders incur artificial costs where the money goes directly to them as opposed to forming a net profit which is used for divs. This is a risk which exists pretty much with any company. Not to say it can’t happen (it happens regularly in the corporate world), however here it does not seem to make much sense because a) the accounts are audited by a Big 4 and b) the value increase in their own token stake can far outweigh the siphoning of funds
  • Passive token holders: 1/ token value rises, 2/ receive dividends
  • model the development of the company, margins and profits
  • compare to the market price
  • decide based on the resulting dividend yield
  • estimate total interest quantum paid through the platform
  • estimate % usage for the token (repayment and collateral)
  • apply discount
  • come to a resulting cash flow (implied saving) stream
  • value via an NPV
  • investing the saved amount on interest into NEXO and getting the dividends will reduce the effective interest rate paid
  • when the dividend yield is higher than the effective interest rate, people could be incentivized to take out a loan only to reinvest into NEXO tokens (obviously ignoring price movements)
  • The discount works similarly to the way some of the exchange tokens work, de facto a “bribe” to use NEXO vs. competitors like Salt or Unchained Capital. It is a clever way to attract and retain customers as well another competition lever in addition to its standard operating options (interest rates, funding costs, cost income ratio, management execution etc). The question is who is paying for the discount. It is not the lender, so it has to come out of Nexo’s PnL, meaning that it affects the bottom line, which is used for dividends. This is the big trade off here — effectively a dynamic marketing cost to attract and retain customers. It reduces the available dividend, but increases the profits and potentially the token usage and holdings. If exchange tokens like the Binance Coin are any indication, they have been used far more as a speculation asset as opposed to their utility aspect (reduced fees) so there’s that
  • One always has to ask the question what the current token price prices in, i.e. when we input the price, what does that tell us about the level of the dividend yield. In other words, where should the company be in its development today to justify a given yield. Obviously, we need to make a few assumptions to get an idea, but, given standard inputs for a loan book, net interest margins and cost-income-ratio, we can derive a net profit from which to imply a div yield. Then we should compare this to our risk and similar cashflow options like dividend paying stocks or bonds. See below for more
  • One important differentiation to make is between the value of the token as an investment and as a speculation. Even if it does not look that attractive as an investment based on one’s risk-reward, it may be a good speculation instrument if the price action of exchange tokens is any indication. Or this may not repeat again, of course
  • There is a clear incentive to hold the token — getting dividends and holding it as collateral to get a discount on the interest payments. Intuitively, I believe the velocity on such an instrument will not be very high, as opposed on some exchange tokens for example, which also helps with value increases.
  • They know that to win you need to be (own) a bank. Buying a FDIC-insured deposit institution in the US to lower its funding cost is crucial. For example, one of Nexo’s competitors — Unchained Capital shows APRs between 12–18% on its website. These numbers are high and will go down with more competition entering this space.
  • Prepare loans for securitization — a common strategy for traditional online lenders to expand their loan books and involve more institutional investors indirectly — again, this is complex and so knowing what to do and how is a big benefit
  • The effect of crypto lenders on the velocity of BTC, ETH (and other coins used as collateral) is likely to be positive because instead of selling, people will simply move them and get the liquidity
  • P2P lending will provide an indirect fiat-crypto on-ramp for institutional investors, which is also positive
  • An interesting development is that these tokens will compete with other crypto passive income alternatives like staking yields, returns from work tokens or TCRs
  • An obvious effect will be the opportunity for HODLers to leverage their holdings. In other words, the effective interest rate will act as a competitor to other funding alternatives involved with coin lending, margin rates etc

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Boris

Boris

Climate, crypto, macro and tech M&A