Dezy Pte Ltd UEN: 202116623N, 
68 Circular Road #02-01, Singapore 049422

Is Dezy Sustainable?

Eric Dadoun

CEO at Dezy
Published on 07.09.2022
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Transparency has been a rallying cry from Dezy since we launched. It’s not an item on our PR strategy but rather a reflection of our appreciation that startups are confusing, crypto is confusing and we happen to straddle both worlds. 

Add to that the fact that our users are entrusting us with their deposits and transparency becomes that much more important. Add to that the fact that our industry has undergone a monumental series of shocks the past few months and transparency suddenly takes centre stage.

There are various components to transparency and we are constantly working hard to address the topic. For today’s blog we’d like to specifically address a question that has increasingly popped up lately; is Dezy sustainable and if so, how? 

How is Dezy Sustainable?

Apart from general curiosity as to how companies function and whether the service providers we build relationships with will be there for the long term, this is a really good question in light of recent events that have rocked the crypto industry and the CeFi industry specifically. 

How is it possible that companies which raised 10s of millions of dollars imploded in such a dramatic and seemingly overnight fashion? Let’s start here and then dive into what makes Dezy different.

Company operational expenses aside, there are three main issues which led to these industry implosions.

  • Leverage
  • Trading with customer funds
  • Mismatching of lending and borrowing terms

Leverage

Simply put, leverage is the ability to put more money into the market than you actually own. So for example if you have 1 dollar in your possession, leverage would allow you to put multiples of that value to work in the market either by placing some kind of collateral down with your counterparty or in some cases even without collateral if there is a degree of “trust’ and “legitimacy” between the participating parties.

How much can an entity or individual leverage? Depends on the terms of the casino … err … counterparty. 2x? Probably. More than 10x? Sometimes! YOLO!

In a bull market when asset prices are skyrocketing “to the moon” this is an immensely profitable strategy. For every dollar you deposit, your profit margin is multiplied by 2, 10 or more depending on your leverage position. Sounds great, right?

The flip side of that is when asset prices move against you, your losses are magnified by that same multiplier. Your service provider is still obligated to pay you back but do they have 2, 10 or more in reserves to pay you back when their leveraged positions unwind? Apparently not. 

Did they even tell you they were doing this with your money? That’s a blog for another day.

Leverage is a high octane potion which is dangerous and toxic for most market participants.

Trading with Customer Funds:

Similar to leverage, this is an act of exposing customer funds to a higher level of risk.

During a crypto bull market there are an immense number of opportunities to trade fiat or stablecoins into core crypto assets and enjoy the upside that these assets tend to deliver during bull market conditions.

Just like with leverage though, what happens when asset prices start to unwind and bull conditions pivot into bear conditions? Suddenly your core crypto-assets do not convert back into the same amount of fiat or stablecoins that you are liable to pay back to your customers.

Sprinkle some leverage on top of trading with customer funds and my goodness, what a potent cocktail you’ve brewed on the road to insolvency court.

Mismatching of Lending and Borrowing Terms

Perhaps the most straightforward of the bunch, mismatched lending and borrowing terms can leave an entity in a position where they may have assets on their books to pay back customers with but can’t actually fulfill their customer facing terms.

For example, if users are able to deposit funds into a platform with no lock-up period or a limited lock-up period but that platform lends those funds out to a 3rd party with a 3-month, 6-month or longer lock-up period, what happens when users want their funds back?

Glad you asked.

If the platform has sufficient reserves and risk management practices then it can probably manage those cash flows. 

Alternatively, a platform could choose in some cases to terminate their lending relationships, if those relationships even legally permit such an action, but often have to do so at a discount and thus incur a loss on those funds.

What about in a historically bad market situation where there is a de-facto “bank run” taking place whereby users are requesting their funds back en masse? This has led to the domino effect of service providers freezing withdrawals and preventing customers from accessing their funds.

Leverage, trading with customer money and mismatched terms are all uniquely complicated but when sprinkled together into one recipe you have a disaster waiting to happen.

These seem like easy things to avoid, right? Depends on who you ask.

From the perspective of some service providers, these are desirable activities as they offer the provider an opportunity to maximise their profits. More profits lead to more hiring, more fundraising, and more growth. Until it doesn’t.

Just because a model is easy doesn’t mean it's the best one to pursue. 

Now that we understand some of the main causes that led to recent industry implosions, what makes Dezy different? 

Simple really! We do not leverage, we do not trade with customer funds and we do not mismatch lending & borrowing terms. 

Nuts, we know.

Where does your money go then exactly? You can learn more by visiting our diversification page. In the near future we will be releasing additional data around how much is deployed where and when.

Does that mean that Dezy is indestructible?

Sadly not. We are still a startup and like any business, we need to scale on top of a strong foundation.

As part of our risk mitigation strategy we have always deployed funds across a wide range of sources of yield. Admittedly this is not always the most profitable strategy as by definition diversification means that we are prioritising a mitigation of potential loss as opposed to optimising for highest returns.

Beyond what we pay to customers (5.5% APR / 5.65% APY) we aim to make a positive margin on average. While market conditions dictate the yield from our individual partners, we’re happy as long as we generate a margin on average and incur the least possible risk in doing so.

OK but can we be a sustainable business on low risk deployment strategies without leverage and on limited margins? 

Yield was never the end game but a building block. 

Yield has always been phase 1 in our vision of how to simplify crypto and fintech. Through the resources we have access to, which are a combination of equity fundraising and profits generated via yielding, we are actively working on adding additional and complementary products for our users to benefit from.

We’re trying to build an actual business. Harder said than done but that's the goal and we are grateful to our equity investors and to our customers for giving us the chance to do it! 

So, let’s say Dezy fails at building an actual business and all its planned products don't bring the additional revenue it hopes. Can’t fundraise forever, right?

In the very unfortunate situation that Dezy has to shut its doors because we failed to scale or should customers ever want to withdraw their funds en masse, please again check our statements around leverage / trading / mismatched terms.

All funds are there free of leverage, free of complex strategies to unwind and readily accessible to users as and when they want it. Beyond straightforward strategies we have always built with security and redundancy in mind with our multi-sig vaults at Copper being an example of that. Learn more about how we secure funds

To summarise:

  • We do not leverage our positions 
  • We do not trade with customer funds
  • We do not mismatch lending and borrowing terms
  • We view yield as a building block to a broader product portfolio 
  • We are building a business together with our investors and for our customers

Is Dezy sustainable?

Sustainable is a destination and it's one we are on the path to achieving.

We will continue working towards that destination while continuing to be as transparent as we can with our customers. Over the coming weeks and months, you can expect more steps towards the topic of transparency through the introduction of things like live AUM counters, sharing of deployment ratios across sources of yield, and quarterly activity reports.
  

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    Dezy Pte Ltd UEN: 202116623N, 80 Robinson Road, #08-01, Singapore 068898
    Disclaimers:
    1. Decentralised finance is an emerging field with fluid regulations and not without risk.
    2. Dezy is not licensed by the Monetary Authority of Singapore.
    3. Learn more about how we mitigate risk for consumer protection with insurance, diversification, and technical security measures.
    4. Dezy insurance coverage applies only to certain assets / protocols where insurance is applicable. Learn more about insurance.
    Dezy Pte Ltd UEN: 202116623N, 80 Robinson Road, #08-01, Singapore 068898