The leverage of Decentralized Finance is spreading to exchanges.

Recently researched the Alpha mechanism of BN, which is quite popular in the industry, but I don't seem to be very interested in it. However, I want to share three other products from BN and reflect on BN's innovative ability to follow defi, and also reflect on how the leverage risks of defi have spread to cex.

I used to think that the competition between DEX and CEX was straightforward, and I believed that CEX should be very mature by now with no major innovations. However, the development of BN in recent years has completely contradicted my judgment. Binance has indeed managed to defend its CEX moat while also capturing a large share of the DeFi business.

It seems that as long as one is willing to invest and stay open-minded, even the most mature products have room for innovation.

Binance's innovations make me feel that they have fully utilized the innovations of DeFi while combining it with a centralized experience, which has indeed enhanced user stickiness for Binance.

The first product was actually a failed product for Binance. However, I was still surprised that Binance dared to create this product at that time.

At that time (probably three years ago), Binance created a trading method on its CEX platform that allowed users to add LP tokens to a liquidity pool, imitating the AMM protocol of Uniswap. The algorithm was likely a complete copy of Uniswap V2. For example, users could add a liquidity pool for BTC/BNB, and other users could directly swap BTC for BNB, while users who added to the liquidity pool could earn transaction fees.

We have heard many large companies in various industries refuse to adopt new innovations because launching innovative products competes with their existing market, ultimately leading to the collapse of these large companies.

For example, Nokia was the first to invent the smartphone, but fearing the impact on its dominant position in the feature phone market, it did not transition to smartphones on a large scale, and ultimately, Nokia failed.

A similar case is Kodak's refusal to produce storage card cameras in order to protect its film business.

At that time, Binance dared to launch the AMM algorithm for adding liquidity pools and swap trading, attempting to directly impact the largest order book business of centralized exchanges. I thought it was quite determined.

However, I overestimated the opportunities for the AMM protocol in CEX, and the development is that Binance has shut down this product.

The second product is Binance's flexible wealth management, which is actually modeled after liquidity pool lending protocols like Aave.

Binance's flexible savings is essentially a lending product. Users can deposit various cryptocurrencies into flexible savings, creating a deposit pool. The deposits provided by users can also serve as collateral for borrowing other cryptocurrencies within the flexible savings.

For example, you can deposit ETH into a flexible wealth management product, and then this ETH can be used as collateral to borrow USDT. ETH deposits can earn deposit interest, while borrowing USDT requires paying borrowing interest.

This pooled lending method, which corresponds to peer-to-peer (P2P) lending, greatly enhances capital efficiency and flexibility. In P2P lending, the collateral of the borrowing user cannot earn deposit interest. Additionally, the funds of deposit lending users must be matched before they can be lent out, and if there is no match, they do not earn interest. In a pooled method, interest is always available as long as there is a borrower; all deposits share the deposit interest according to the amount of funds, and deposit users can redeem their deposits at any time (in the vast majority of cases), unless a bank run occurs.

I checked several other exchanges, and their lending services are still P2P; only Binance offers this pooled AAVE model. Obviously, this model provides users with better interest on demand deposits and more flexible leverage conditions (earning interest on demand deposits while being able to borrow coins).

These new advantages are brought to everyone by DeFi, which are utilized by centralized institutions like BN.

The third product is the liquidity token products BFUSD and FDUSDT, issued under the model of reusing liquidity tokens for restaking.

BFUSD is simply a financial product offered by Binance that allows users to purchase it using USDT and USDC. In return, Binance will provide users with a token called BFUSD (liquidity token), which can also be used as collateral in Binance's contract accounts for trading contracts.

In this way, users can use a portion of their funds to obtain the returns from the purchased financial products, while also betting on the outcome in contracts.

The FDUSDT token is actually a liquidity token for Binance's flexible savings, equivalent to AAVE's a-token. This means that after users deposit USDT into Binance's flexible savings, Binance gives the user an FDUSDT token, which the user can then use to trade contracts.

In this way, users can earn interest from their liquid financial management while also betting on contracts with the same funds.

Of course, betting contracts, statistically speaking, often have a small portion that profits, but in the long run, most people will incur losses; such products are truly insane.

This liquidity token is used again for mining in other protocols, which is a skillful play in DeFi, and now it's been learned by CEX.

This innovation in DeFi has been adopted by CEX, and among several major exchanges, I only see BN doing it, while other CEXs are not. This is also strange; do other CEXs not know about this capital efficiency, that using one capital multiple times has always been the biggest demand in gambling? Are they all very restrained?

I guess one possibility is that these DeFi tricks and gimmicks are essentially leveraged, which inevitably amplifies the risks brought by volatility. To smooth out these risks and prevent various leveraged products from being liquidated during large fluctuations, a very deep market is required, and this may be a condition that only Binance has.

Seriously, three years ago (before 2022) I could have admired DeFi and thought that the various composability of money was so good, and this is what finance needs, and this is what capitalism needs. But after round after round of big fluctuations in the market, the price of ETH has fluctuated huge every time without exception, and I feel that the leverage of defi carries some kind of original sin.

And now CEX has learned these too, and it is uncertain whether it will evolve into a huge disaster in the future.

Please remember, regardless of the protocol or the tricks used, if a fund is utilized multiple times, it is leveraging, which amplifies the volatility risk. The more it is used, the greater the risk.