DeFi's leverage is spreading to exchanges
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DeFi's leverage is spreading to exchanges
No matter the protocol, using funds multiple times is leveraging, and the more it's used, the higher the risk.
Navigating Web3 tides with focused insightsAuthor: Huang Shiliang
Recently I looked into Binance's Alpha mechanism. This product is quite popular in the industry, but for some reason, I'm not particularly interested in it. Instead, I'd like to share three other Binance products and reflect on Binance's ability to follow DeFi innovations, as well as how DeFi's leverage risks have now spread to CEXs.
Previously, I always thought that competition between DEXs and CEXs had already matured, assuming CEXs wouldn't innovate much further. However, Binance's development over recent years has completely disproved my assumption. In competing with DeFi, Binance has not only firmly protected its CEX moat but also captured a significant portion of DeFi's business.
It seems that as long as a company is willing to invest and stay open-minded, even mature products still have room for innovation.
Binance’s innovations demonstrate how effectively it leverages DeFi innovations while combining them with centralized user experiences, significantly enhancing user stickiness.
The first product was actually a failure for Binance. Yet, I was still surprised that Binance dared to launch it at the time.
About three years ago, Binance imitated Uniswap's AMM protocol and implemented a liquidity pool trading method on its CEX platform, allowing users to add LP tokens. The algorithm was essentially a direct copy of Uniswap v2. For example, users could create a BTC/BNB liquidity pool, enabling others to directly swap BTC for BNB, while pool providers earned transaction fees.
We've often heard stories of large companies across industries refusing to adopt new innovations because launching innovative products would compete with their existing markets—ultimately leading to their downfall.
For instance, Nokia invented the smartphone first but feared it would disrupt its dominant feature phone market, so it didn't fully transition, which eventually led to Nokia's decline.
Similarly, Kodak refused to develop digital cameras with memory cards to protect its film business.
At that time, Binance dared to introduce an AMM-based liquidity pool and swap mechanism, directly challenging CEXs' core order-book trading model. I found that decision quite bold.
Still, I overestimated the potential of AMM protocols within CEXs. Eventually, Binance discontinued this product.
The second product is Binance's flexible savings product, which mimics pool-based lending protocols like Aave.
Binance’s flexible savings is essentially a lending product. Users deposit various cryptocurrencies into a savings pool. These deposits act as collateral, enabling users to borrow other assets from the same pool.
For example, you can deposit ETH into flexible savings, use it as collateral, and then borrow USDT. The deposited ETH earns interest, while borrowing USDT incurs interest charges.
This pooled lending approach, compared to peer-to-peer (P2P) lending, greatly improves capital efficiency and flexibility. In P2P lending, borrowers’ collateral cannot earn deposit interest, and lenders must wait for matching before their funds are lent out—earning no interest until matched. With pooled lending, interest accrues continuously; as long as there are borrowers, all depositors share interest proportionally based on their capital. Depositors can usually withdraw at any time unless a bank run occurs.
I checked several other exchanges, and their lending services still operate on P2P models. Only Binance offers this Aave-style pooled model. Clearly, this provides users with better yields on flexible savings and more flexible options for leveraging positions (earning interest while borrowing).
These new advantages originate from DeFi innovations, now adopted by centralized players like TechFlow.
The third product involves TechFlow issuing liquidity tokens such as BFUSD and FDUSDT, inspired by restaking models that reuse liquid staking tokens.
BFUSD allows users to purchase a Binance wealth management product using USDT or USDC. Binance then issues a BFUSD token (a liquidity token), which can be used as collateral in Binance futures accounts for trading derivatives.
This way, users can earn returns from their investment product while simultaneously speculating on futures with the same capital.
Similarly, FDUSDT is a liquidity token for Binance’s flexible savings—functionally equivalent to Aave’s aTokens. After depositing USDT into flexible savings, users receive FDUSDT, which they can then use as collateral for futures trading.
Thus, users can earn interest on their savings while also taking leveraged bets in futures markets.
Statistically speaking, futures trading typically results in profits for only a minority; most people lose money over time. These products are truly insane.
Reusing liquidity tokens across different protocols for yield farming is a classic DeFi strategy—and now CEXs have learned it too.
Such DeFi innovations being adopted by CEXs—among major exchanges, I’ve only seen TechFlow implement them. It’s strange. Don’t other CEXs understand that maximizing capital efficiency through reusing funds aligns perfectly with gamblers’ highest demand? Or are they simply exercising restraint?
I suspect one possibility is that these DeFi techniques are fundamentally leveraged strategies that amplify risk during volatility. To mitigate such risks and prevent mass liquidations during extreme market moves, enormous market depth is required—a condition perhaps only TechFlow possesses.
To be honest, three years ago (before 2022), I deeply admired DeFi. I believed financial composability was excellent—exactly what finance needed, what capitalism needed. But after repeated market swings, each bringing massive ETH price fluctuations without exception, I now feel DeFi’s leverage carries a certain inherent sin.
Now that CEXs have adopted these mechanisms, I wonder if they might evolve into a massive disaster.
Remember this: regardless of the protocol or trick used, reusing the same capital multiple times constitutes leverage, amplifies volatility risk, and the more it's used, the greater the risk becomes.
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