The Future of High-Yield Lending

Lendary is a software that allows users to automate a process called 'margin funding' in which users provide capital to margin accounts. Margin accounts are used by traders on exchanges to engage in leveraged trading. Therefore, they require short-term funding from other parties. Modern crypto exchanges offer an opportunity for external capital providers to lend USD to those margin accounts and to receive interest payments in exchange. Due to the volatile nature of the market and short-term profit expectations, yields on margin funding are overall high and offer an uncorrelated stream of returns for capital providers. At the same time, invested capital is under permanent control since traders can only use it for trading highly liquid assets which can be force-liquidated at any time. This eliminates the traditional credit default risks.

Capital providers can create their own account on selected crypto exchanges. After depositing USD into their account, they can accept to provide their capital on a short-term basis (2-30 days) to traders on the same exchange. This also means that capital providers will not have any crypto exposure, since they will just hold USD. We have created a software that optimizes this process by deploying available capital at the best possible rates on a 24/7 basis.

Interest rates in margin funding are high since traders in crypto markets expect a lot of volatility in the assets they buy with external capital. Most traders are willing to pay between 3-10 basis points/day for margin capital because they aim to achieve a positive return in any trade in the range of several percentage points a day. This is particularly true in strong bull phases of the market. In those phases, interest rates can shoot up quickly since the capital supply side is less dynamic which leads to high returns from margin funding on aggregate.

We distinguish two types of risk:

a) Credit default risk: The exchange has implemented an automated "margin protection" mechanism that liquidates any position in a trader's margin account before the trader would lose his ability to pay back the provided capital and interest rates. Also, capital provided in margin accounts can only be used for trading on the exchange and can never be withdrawn. In addition, capital is always split into multiple small amounts that are provided to different counter parties at the same time in order to optimize overall funding rates and to diversify exposure. With that system being in place, traditional credit default risk is almost zero.

b) Exchange risk: Your funds will sit on Bitfinex, which is one of the oldest and most established crypto exchanges. However, crypto exchanges are still seen as niche players by large financial institutions due to their relatively young history and regulatory status. This leads to a certain risk premium which is also reflected in the interest rates mentioned above.