The borrowing brother PayPal Finance’s 300 million US dollars of borrowing volume, only about 100 million comes from customers, it is actually the largest customer.
PayPal’s leverage ratio is about 3-5 times, the highest in the lending industry. High leverage is also high profit. PayPal is about 3-5 times the profit of similar companies.
High profits are also high risks. A large number of liquidation occurred during the period of 312. PayPal defaulted all the funds. Tether extended the time for replenishment from 48 hours to one month, saving the company.
The essence of the early PayPal model is very simple, it is to obtain funds at low cost, plus leverage to bet on the rise of Bitcoin. But it is also transforming.
There have always been two doubts about PayPal Finance in the market.
First, PayPal stated in its 2019 annual report that the loan balance is about 300 million US dollars. In comparison, Matrixport only has 100 million US dollars and Amber only 60 million US dollars. Why is PayPal’s loan balance so high? In fact, miners in the market do not have such a large borrowing demand.
Second, compared with other lending companies, PayPal seems to have relatively high profits, and it is very generous compared to competing products in sponsoring market events and organizing parties. As we all know, the basic profit of the lending industry comes from the very small interest difference between the borrower and the funder, so where does PayPal’s profit come from?
A number of insiders and people familiar with the matter told Wu that the core model of the PayPal model is to absorb funds at low cost and add leverage to buy Bitcoin. The actual loan balance to customers is only about 100 million US dollars, and the remaining The 200 million US dollars is suspected to be a series of pledged loans from PayPal on its own. PayPal’s own funds cannot be completely separated from client funds.
PayPal received financing from NGC in the early days and started buying coins from $3,000. It bet the company’s fate on the rise of Bitcoin and made a lot of profits. However, during the period of 312, PayPal almost went bankrupt due to over-exposure, defaulting on all the funders in fact, and almost lost all their customers and funds. After 312, PayPal learned its lessons and paid more attention to option hedging, and relatively reduced its leverage ratio, and strengthened inter-institutional lending. But whether it can essentially combat the risk is still doubtful.
The favorite American drama of the founder of PayPal is “Billions”, which tells how hedge fund tycoons fight against regulators and gain wealth. The two founders of PayPal started from scratch and often stayed up late. This seems to be a successful company that has made profits. Some people think that its hedging design is good, but if there is the next 312, can PayPal survive it?
1 PayPal mode
PayPal’s main business lending model is:
A miner pledged 100 BTC to PayPal, and PayPal lent 50%-65% (LTV) of USDT equivalent to 100 BTC to the miner in accordance with the pledge loan terms, at an annualized interest rate of 8.88%-15%. The general situation is that PayPal receives 100 BTC pledged from miners and pledges part of the BTC to Genesis, Tether, BlockFi, OSL and other institutions. The inter-institutional LTV is generally higher than 65% to obtain USDT, and then from overseas The USDT borrowed by the institution is lent to miners. PayPal is a back-to-back business and faces risk control at both upstream and downstream ends.
Generally, the pledge rate of overseas inter-organizational lending is 71%-100%, and the annualized interest rate is 6.6%-8% (the market interest rate changes from time to time, and the common interest rate in the past year is 8% or below 9%). It can be seen that if only the interest difference is earned, then the profit will be very small. Therefore, almost all lending companies put the money-making method on the pledge, and most of the customers know it well.
Therefore, the real business model of PayPal is:
PayPal’s own funds, users’ collateral, and funds obtained from PayPal’s own wealth management products will be leveraged. PayPal can use the user’s collateral between 10%-50%. For example, if you pledge 1 BTC to PayPal, then 0.1-0.5 BTC PayPal can be used for pledge in exchange for USDT.
If BTC rises, PayPal can earn a profit multiplied by the leverage. PayPal told overseas institutions that the borrowers are miners, so the risk is very low, in exchange for low interest rates and high pledge rates (LTV).
In essence, PayPal’s business model does not rely on low-profit borrowing interest differentials to make money. Instead, raise funds at low cost, and then increase leverage with repeated mortgages, betting on the rise of Bitcoin to make profits. However, PayPal began to purchase a small amount of put options to hedge in the later period, and its business model has become more abundant, such as a large number of option products with toc and pure asset management business.
The minimum interest rate PayPal gives customers can reach 6%, which almost means that PayPal is still losing money on the interest margin. So how does PayPal make money? The answer is obvious.
However, most lending companies use their clients’ pledges, but PayPal’s leverage is the highest. The risk of this operation is that once the currency price plummets, PayPal will not have the ability to counter risks due to its high leverage and extremely low reserves, and it is extremely prone to liquidation.
2 312 Fright
So 312 came.
The price of Bitcoin plummeted that day, and PayPal users needed to cover their positions to make up BTC. At the same time, PayPal also needs to cover BTC with a large number of institutions such as Tether. But PayPal’s money is trapped in a series of highly leveraged operations, and there is no BTC to cover positions at all. Therefore, all financial institutions such as Tether, BlockFi, and OSL have defaulted. At that time, PayPal couldn’t even get 200 BTC, and tether alone needed to cover more than 2,000 BTC to ensure that the position was not liquidated, and more than 5,000 BTC were needed to pull back the original pledge rate.
PayPal co-founder Wang Li told everyone that night: This industry is gone.
If Tether chooses to close the position at this time, PayPal’s BTC and the user’s pledge will all be lost. OSL did choose to close the position, but the magnitude was relatively small. At this time, Tether gave PayPal a chance to survive. It did not choose to close the position, allowing it to raise funds within a month (generally, the time to cover the position is only 48 hours).
Subsequently, PayPal quickly released an option wealth management product with a yield of up to 50%, and raised more than 2000 BTC. At the same time, some users broke their positions, and PayPal obtained their collateral of about 3000-4000 BTC, and a small sum of them to cover Tether every day.
The good news is that with the rapid turnaround of currency prices, PayPal broke away from the series of leveraged transactions, and even made a lot of profits. It sponsored a large number of events and launched new businesses such as mining pools.
Looking back at 312, if Tether did not give a month, if bitmex did not go down (causing Bitcoin to continue to fall), if the market did not immediately pick up, and any one of the three conditions was met, PayPal is currently bankrupt.
After 312, PayPal was questioned on the overseas funding side. BlockFi and OSL interrupted their cooperation with PayPal, and Tether also interrupted their cooperation. Recently, they are resuming. The partner that continues to support PayPal is Genesis. Previously, under a high degree of trust, BlockFi gave a pledge ratio of almost 1:1.
There is a favorable explanation for PayPal that during 312, in order to protect customers from liquidation, PayPal defaulted on the funder and suffered pressure from the funder. At the same time, due to the downtime of Deribit, the option could not be sold. I owe them a lot of BTC. There is evidence that during PayPal’s 312 period, customers liquidated their positions and collected more than 3/4000 bitcoins.
In essence, PayPal has blocked its fate on Tether. It has long believed that the central bank of this cryptocurrency will give it time for the industry, and Tether can print money indefinitely to fill the shortfall. Tether did not respond to Wu’s consultation on the blockchain, suspected to be worried about whether this behavior will bring legal risks, and whether other borrowers will also request extensions.
3 Adjustment and reflection
PayPal claims to be a commercial bank, but it does asset management and funds. However, PayPal is indeed transforming, starting to focus on asset management business.
It is not uncommon for the currency circle to have a high-leverage proxy investment model. PayPal’s 3-5 times leverage does not seem to be high when compared with the contract users’ habitually ten times a hundred times. But there is a problem with the PayPal model. Do users and funders know that PayPal is operating with high leverage? At present, the vast majority of users and funders do not understand, some people vaguely guessed this situation. PayPal also admits that users are mixed with their own coins and it is almost impossible to distinguish them.
PayPal once promised: “From the very beginning of its creation, PayPal Finance decided to manage its collateral safely and transparently through multi-signature hot and cold wallets, and never unilaterally use users’ collateral for transactions, and completely eliminate the loss of collateral transactions due to market reasons.” . The unilateral three words are interesting. In the contract between PayPal and the customer, there is only one short sentence for the pledge: “The lender should properly keep the pledge and its related vouchers.” There is a saying inside PayPal that if the customer is willing to accept a higher interest rate, they can promise not to Use pledges. Recently, PayPal is still providing customers with loan services at an interest rate as low as 6%. What is the purpose of such a loan at a loss? The model PayPal chose is high-risk and high-profit. At present, PayPal also provides unsecured credit loans to many quantitative teams, which may further increase risks.
However, this kind of expression is not unusual. For the lending industry, almost no one will completely immobilize users’ pledges. Relying on pledges to make money has almost become a consensus. It is just a matter of leverage and exposure (level of risk). For example, Amber will also use users’ collateral for quantitative transactions. Matrixport did not use customer pledges before, but faced with the pressure of losing money competition.
312 brought a profound lesson to PayPal. They began to buy some options for hedging in the market, and at the same time extended credits to a large number of institutions for borrowing, and increased their own funds and reserves.
If you look at PayPal from the perspective of traditional finance, it does have a lot of problems. But from the perspective of the cryptocurrency industry, some people may think that the “PayPal model” is very successful, because it successfully survived the crisis and made profits, and even wants to imitate it. In the unregulated cryptocurrency industry, some people think that PayPal may be the smartest because it uses funds to the extreme.
However, some people think that PayPal is doing something to break the east wall and repair the west wall. It is a bit like a P2P model. It must be very delicately balanced. If a certain link in the chain breaks, the entire company may be broken. Bankrupt.
From a rational point of view, compared with Cobo, Biyin, Matrixport, renrenbit, etc., PayPal does not have a strong backing. The founder/parent company has tens of thousands of dollars to support at any time. The founder of PayPal started from scratch and achieved the ultimate in the chain. An entrepreneur in the same industry told Wu about Blockchain that he might choose a similar model if it were. But PayPal stirs the entire industry with a catfish attitude, and the result may be that the industry has to imitate the high-risk “PayPal model.”
PayPal investors include Dragonfly, Parallel Ventures, NGC, etc. PayPal’s core customers or partners include Yuchi, NGC, Nervos, Dforce, Hash Times, BigOne, the original Canaan Hangzhou, Kucoin, etc. The beginning of PayPal was highly tied to the Biyin mining pool, but the subsequent cooperation between the two parties was suspended. Biyin began to launch its own financial service business.
Interest statement: The author has no interest relationship with the relevant parties in the article.
