Bybit’s decision to integrate Avalon – connecting a seamless CeFi experience with DeFi yields – is a daring one for sure. Is it a calculated step towards financial innovation, or a reckless gamble that amplifies systemic risks within the already volatile crypto ecosystem? The devil, as usual, is in the details—and the room for unintended consequences.

Is Centralization Really Decentralization?

The allure of CeDeFi is understandable. It promises the best of both worlds: the user-friendly interface and regulatory comfort of centralized exchanges combined with the high yields and innovative financial instruments of DeFi. Let’s face it, are we really democratizing access to finance, or just putting fancy DeFi protocols in a centralized box? And at what cost?

Avalon, in this situation, serves as the vital connector. It pools your BTC with other Bybit users to generate yield on your Bitcoin, using a stack of integrated protocols to generate the yield. Your BTC collateralizes institutional borrowers’ USDT demand. These dollars are subsequently channeled into high-impact strategies backed by Ethena Labs. This sounds a lot like the CDOs of 2008 – re-packaging dangerous debt to obscure the true risks. Are we about to repeat that same folly – only this time with a bunch of shiny new crypto playthings?

The integration of multiple protocols – Avalon, Mantle, Antalpha Prime, and Ethena Labs – creates a complex web of dependencies. If one link in this chain breaks, the whole operation could come crashing down. Think about Ethena’s USDe de-pegging, or institutional borrowers defaulting on their USDT loans. The cascading effects would be catastrophic, affecting not just Bybit users, but the entire DeFi ecosystem. Ironically, it is this same interconnectedness that produces a storm of factors ripe for contagion to spread rapidly.

$2 Billion Credit Line, A Double-Edged Sword?

Avalon has a $2 billion initial credit line, with room to scale. On the face of it, this looks like a positive strength and stability indicator. Such a massive credit line is a potential source of systemic risk. Most critically, it concentrates immense power in the hands of Avalon, empowering them to exercise considerable influence over the DeFi ecosystem. This raises questions about transparency and accountability. Who are these institutional borrowers? What are their risk profiles? What if they’re unable to pay back those loans?

Avalon provides a predictable fixed 8% borrowing cost that could attract deeper pocketed institutions. That does raise some very important sustainability questions. Can these borrowers reliably produce returns above this cost, particularly in volatile and uncertain market conditions? Otherwise, the system would quickly become untenable, resulting in a solvency crisis and ultimately collapse.

This feels a lot like the startup energy of early peer-to-peer lending. Because platforms often promised high returns to their investors, many of the borrowers ended up defaulting on loans, resulting in huge losses for investors. Must we be doomed to make the same mistakes from traditional finance in the new DeFi ecosystem?

The Ethena Labs Factor: High Yield, High Risk?

The USDT that is borrowed through Avalon gets deployed into high-yield strategies through Ethena Labs, most notably using USDe and sUSDE. Ethena’s synthetic dollar protocol provides high synthetic yields unmatched by anything else out there. Yet, it has faced backlash for the potential dangers that it poses. The reliability of USDe is based not on complicated markets for hedging and arbitrage, but a trust in the mint. This system would be particularly susceptible to market shocks.

Ethena’s recent $100 million raise to build iUSDe, a regulated version for financial institutions, suggests a wider ambition. It also begs the question of the long-term sustainability of their existing model. Are they able to produce the same high yields while meeting ever-tightening regulatory requirements? What would happen if regulators decided to crack down on synthetic assets?

  • Scenario 1: USDe de-pegs due to a black swan event.
  • Scenario 2: Institutional borrowers default on their loans.
  • Scenario 3: Regulators shut down Ethena's synthetic dollar protocol.

Any of these scenarios could trigger a chain reaction, leading to significant losses for Bybit users and potentially destabilizing the entire DeFi market. This is not merely a question of lost dollars and cents, but the further erosion of public trust in the crypto ecosystem as a whole.

Just keep in mind that in the crypto space, high yield usually equals high risk. Please don’t be fooled by the allure of quick returns. Perform your own due diligence, learn the risks associated with trading and investing, and never invest more than you can afford to lose. The future of finance is being written today. Let's make sure it's built on a foundation of sound principles and responsible innovation, not on a house of cards.