Binance: 50% Yield on Hive

If you can't explain the yield you are the yield

A meaningless catchphrase espoused by Bitcoin maximalists.
But there is some truth to it.
We should, in fact, know how things work.
Especially in an industry that subsidizes scams at an exponential pace.
Ignorance breeds unsustainability; whether by accident or intelligent design.

Uhhhh, wut?

Yesterday mrtats commented on my blog something about 50% yields on Hive. I didn't 100% know what he was talking about, but clearly it seems to be these flex accounts on centralized exchanges, particularly Binance Flex. So I've finally come to the conclusion that I can no longer ignore these yields and need to figure them out. 50% is absurdly high... how could they possibly benefit by offering our network a rate this high? I did what any responsible adult would do: asked AI and blindly trusted everything it told me.

How to provide yield in exchange for liquidity 101

• Staking and Validator Rewards:

We already know this is not what Binance is doing in this particular case, but it's worth pointing out that it is an option for the lower yield assets. Binance takes the tokens and stakes them on behalf of the user. They earn stake-based yield and provide the user a cut of that yield. We know this isn't happening because Hive curation would be hard-pressed to even offer 10%, let alone 50% (and that doesn't even include downvote risk).

• Lending to Borrowers:

We also know that this is probably not what's happening. Who in their right mind would borrow Hive for more than 50% yield? This can only happen if traders are irresponsibly long or short, which isn't a thing right now. It would be much easier and cheaper to simply use the perps market at these prices.

• DeFi Yield Farming and Liquidity Pools:

Also not happening.
Hive doesn't have any LPs that even come close to 50% at the moment. And even if it did there'd be an impermanent loss risk that needs to be accounted for and deducted from the flex yield.

• Proprietary Trading or Arbitrage:

Hm? What's this?

Binance may use deposited assets for internal trading strategies, such as arbitrage across exchanges or markets. By exploiting price differences, they generate profits, part of which can be passed on as yields to users.

This is less transparent but can contribute to high yields, especially in volatile markets.

Ah ha! A contender!

Something like arbitrage could be disproportionately profitable to Binance if they have access to liquidity that we don't have access to. The obvious example here would be UpBit's Korean exchange, where the only entities outside of the South Korean population allowed to interact with the market are vetted and whitelisted by hand.

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Looking at current market conditions on an aggregator shows that Binance accounts for 50% of all Hive liquidity and there's very little spread between UpBit and the rest of the world (which should be the standard but isn't). This could be hinting at aggressive arb strategy ono Binance's part. Or maybe not... well probably not considering our volume is only a couple million dollars total. There's no way to make up the difference with those kinds of numbers. The point here is that it works for more volatile markets, and Hive is quite volatile and often lacks liquidity due to the staking mechanics.

• Stablecoin Lending and Market Demand

Hive is not a stablecoin... so this is not happening.

• Fees: Binance may charge fees on staking or lending, reducing the net yield for users.

Good to note but not good enough to boost gross yield to 50%.

• Market Conditions: Yields fluctuate based on supply and demand for borrowing, staking rewards, or DeFi activity. For instance, during bullish markets, borrowing demand may spike, increasing yields.

AKA don't expect 50% flex yields to last.
It's "flexible" for a reason.

Personally unsatisfied with these answers

So I have to delve deeper and probe the AI to ask more specific questions.

1. Tell the AI we are talking about Hive (not the mining company)
2. Remind the AI Hive has low liquidity.
3. Point out that perps funding rates are not elevated right now.

• Promotional Boost for Liquidity:

Binance may be subsidizing the 50% APY as a promotional campaign to attract liquidity to HIVE, a low market cap coin. This could involve using platform funds or fees to inflate yields temporarily, encouraging deposits and trading volume on Binance, especially for a social blockchain aiming for Web3 adoption.

So... yeah...

I was actually kind of taken aback by the first answer it spit out. It was basically like, "Hey maybe Binance is losing money on purpose here." Which ironically enough is the best answer so far. This is a classic "loss leading" strategy. Binance anticipates they'll need Hive in the future for some reason (or just want to pump the token and/or get it adopted by more users).

Why would Binance want more Hive on their platform?

Well a corporation like Binance already knows that when Hive pumps the funding rate goes drastically negative (often reaching the -2% cap within a single candle). Offering 50% yields could mean that even though the funding rate is normal today they are making a bet that delta-neutral strategies can still turn a profit on average over the year.

Example:

• Hive pumps to 50 cents.
• Funding rate is -2% (ticks every 4 hours).
• Reclaiming 50% yield only takes 25 ticks (100 hours per year).

Meaning the liquidity on their platform would be used to long the perps market while shorting the spot market (sell real Hive to go long on fake Hive and scoop up all the funding rate rewards while bridging the gap between the real asset and the derivative).

Reputation

It's also possible that Binance is more concerned with their perps market reputation than anything else. Again this means they need to have a lot of the underlying asset so they can peg the derivative to the underlying, and they can acquire exposure to the underlying without accepting the risk of the underlying though the yield mechanic (aka paying users yield so that they are the ones accepting the underlying risk while Binance can use those tokens to hedge and stabilize the platform).

Why is this such a powerful strategy for Hive specifically?

Well because Hive is notoriously illiquid due to the 13-week staking mechanic on chain. The ability to short Hive allows anyone to sell their locked Hive by proxy as a perpetuals contract before the real Hive is unlocked. If I want to sell 20k Hive today I can short the market for 20k, and it doesn't matter if number goes up because my actual Hive that isn't unlocked yet is also going up in value (completely negating the value lost from the short). This is an advanced tactic to employ leverage to reduce risk rather than increase it (hedge).

This in turn creates a delta-neutral trading strategy in which locked tokens can be sold today without having to wait. The only question is what APR we're paying to get that privilege. The market has spoken, and the market has told Binance that the premium on Hive shorting is off the charts, which means they might want to employ a loss-leading strategy to get more on the their platform so they can farm the shorts at a later date (because pumps are completely random and unpredictable).

Conclusion

I have no idea how or why Binance can actually offer over 50% yields on Hive, but I have some ideas. Best case scenario they are planning something for our token that requires wider scale adoption and liquidity. Worst case scenario they want to power up those tokens and attack the chain again (unlikely). My bet is on farming the perps market. Binance is betting on a bull market. Aren't we all?