Yang Zhou candidly shares his thoughts for the first time in a public program after many years, presenting a more three-dimensional Yang Zhou to readers, as well as the story behind PayPal back in the day.
Original author: Bill Qian
Bill: Hello everyone, welcome to Bill It Up. This week's guest is Flex Yang Zhou. His vision is to make finance a service accessible to everyone globally. He has successfully founded cash loan company Standard Financial Inclusion, the previous cycle's Web3 lending giant PayPal Financial, and now the stablecoin company Stables Labs. Yang Zhou, hello, welcome to our program!
Yang Zhou: Thank you, Bill, for the invitation.
Bill: We've actually known each other for a long time. I remember the first time we met, I was still at JD, and you were working at PayPal. Back in the 1.0 phase, PayPal was actually very successful. Can you share with us the highlights of PayPal at its peak?
Yang Zhou: PayPal's peak was around March and April 2021. That was right at the top of the last Bitcoin bull market, and Coinbase's IPO pushed the market sentiment to a climax. Bitcoin surged to about $64,000 in April, and the Funding Fee and arbitrage trading heat also reached a peak. At that stage, PayPal's total assets under management, including loans, were about $7 billion.
Bill: $7 billion, that's larger than today's Pantera's AUM.
Yang Zhou: Yes. In fact, centralized lending institutions have always been larger than decentralized ones. For example, at that time, aside from Tether, which has opaque data, the largest publicly disclosed was Genesis, with a scale of about $13.8 billion, far exceeding the scale of current DeFi lending protocols like Aave. The core reason is that centralized institutions serve a different customer base. In Asia, we mainly served large miners. When Bitcoin rose from over $3,000 to over $60,000, we noticed that miners' assets increased by 23 times, leading to the emergence of miners who "initially had only one or two billion dollars but quickly turned into four or five billion dollars." This group was quite representative in Asia. For the U.S., the reason Genesis grew so large was mainly driven by the arbitrage trading of GBTC. From 2018 to early 2021, GBTC was basically at a premium, so there was a very strong driver there, prompting many to borrow BTC from Genesis to subscribe to GBTC, which had a six-month lock-up period, while simultaneously selling BTC in the spot market.
Bill: You just mentioned the six-month lock-up period and arbitrage of GBTC, which was a significant lending scenario for Genesis.
Yang Zhou: Yes, that was the main driver.
Additionally, Genesis needed BTC supply because it had a large amount of USD deposits from clients, so it lent USD to us Asian institutions, and in return, the Asian institutions supplied BTC to Genesis, creating a very large closed loop where both sides got what they needed. As Bitcoin's price rapidly rose, the scale grew larger and larger.
Bill: So at that time, it was like you and Genesis, representing the East and the West, did a swap, and everyone satisfied their own needs.
Yang Zhou: Exactly. The core driver at that time was: Asians needed USD, and Genesis happened to have USD supply; Genesis's clients needed BTC, and we had BTC supply, so the two sides hit it off, and the scale grew particularly fast. However, this growth was more driven by the industry's beta, with the core being the rise in Bitcoin's price itself, rather than natural growth. Because the new supply of Bitcoin is limited, once the price rises significantly, the entire lending market's scale will also be magnified.
Bill: Understood. Based on this, I understand that PayPal later engaged in a lot of proprietary trading, which was actually the starting point for the risks that emerged later, right? Can you share more about this?
Yang Zhou: Yes, PayPal's entire development roughly went through three stages.
The first stage was the pure lending business: miners pledged BTC, and PayPal lent stablecoins to them. This stage was relatively pure. However, after November 2020, as the market rapidly rose, clients raised new demands—they didn't just want to borrow money and leave; they wanted BTC or ETH-based financial products. The problem was that relying solely on lending was difficult to meet this demand. For example, the annualized lending rate for BTC might only be a few thousandths, and the lending rate for ETH was about equal to its staking yield, around 3%-4%. This was not very attractive to clients. So at that time, we thought of using options to solve the yield problem, establishing some positions for clients, creating some structures for selling calls or puts, thereby generating BTC or ETH-based returns. In other words, at that time, PayPal was actually bundling asset management and proprietary trading together with lending. Of course, this was also constrained by the market situation at that time. The entire market was actually in a non-regulated state, so lending companies did not have the awareness of "I must strictly separate lending, trading, and proprietary trading"; everyone was doing it all together.
Bill: But the "mixing" thing, I understand Wall Street is also "mixing" now. I understand what you might be trying to express is that in the process of "mixing," there may have also been a relaxation in risk control, right?
Yang Zhou: Yes, but Wall Street's "mixing" actually follows a cyclical pattern. Initially, everything is mixed together, and when risks arise, regulatory agencies force them to separate. After a while, they find that capital efficiency is low, and financial institutions lobby with regulators, gradually loosening up again, and then they come back together. Then risks arise again, and they are separated… and this cycle repeats.
The cycles of traditional financial institutions are longer than those of blockchain or cryptocurrency. So you will see that in the history of modern traditional finance over the past 100 years, there have been about seven or eight such risk events. In contrast, the cycles of cryptocurrency are much shorter: perhaps every four years, or even every three or two years, which could be about a quarter of the cycle of traditional finance. Traditional finance has been around for 100 years, while we in cryptocurrency have completed it in 20 years.
So at that time, the "mixing" situation was very common. This includes Genesis and Three Arrows as well. It was only after the risk events of the previous cycle that everyone gradually began to "separate." It is also a cyclical process.
Bill: What kind of position risk did PayPal face that eventually led to the liquidation?
Yang Zhou: Actually, it cannot be viewed solely from PayPal's perspective. If we trace the entire process back, the starting point of all risks in 2022 actually came from the high funding rates in early 2021.
Bill: Sorry, which high funding rate are you referring to?
Yang Zhou: I mean the arbitrage of the Funding Fee in the cryptocurrency market, where the "risk-free arbitrage" yield in the cryptocurrency industry was around 40%-50% annualized. Initially, at the end of 2020, the supply of USDT was about $20 billion, and by April-May 2021, it had risen to over $60 billion, quickly doubling the funds entering the market for arbitrage trading. And this money was not short-term; those acting as intermediaries in this trading, whether fund managers, brokers, or others, promised clients a product cycle of one to two years. After another boost in July and August 2021, this money became even more determined to stay, so when the market turned bearish in the fourth quarter of 2021, this money did not exit immediately.
At that time, the Federal Reserve's monetary policy began to enter a tightening cycle, and then things became quite interesting. This money couldn't leave because they didn't want to off-ramp; I promised others a two-year management period, and I had to collect the management fees. So where did this money go during this cycle? They began to look for new outlets, one of the main destinations being Terra's Anchor protocol (UST/Luna). At that time, Terra's scale was rapidly growing, and we also noticed that Luna's market cap began to grow rapidly in the fourth quarter of 2021. Originally, the mechanism of Terra/Luna could be maintained when the scale was small, but as more and more funds flowed in, you would find that too many risks had accumulated.
Some institutions noticed this risk around February-March 2022. Terra boldly announced it would buy Bitcoin on a large scale, briefly pushing a wave of "small spring," giving everyone some expectations for the market, but the flaws of Terra/Luna were eventually discovered by some institutions, which began to launch attacks. The result is well known: in May 2022, Terra collapsed in just three days, with UST evaporating $20 billion, and Luna also vanished, causing a total of $40-50 billion in M0, or base money supply, to disappear from the entire cryptocurrency industry. Considering that the monetary multiplier in the crypto industry at that time was about 30 times, it was equivalent to erasing $600 billion from the entire market's market cap. At this time, the one that stepped up to "take over" was Alameda from FTX. It was originally a market maker, used to not hedging, making money through long-term pump-and-dump strategies. But this time, it faced a direct zeroing out, taking on the liquidity fleeing from Terra and becoming the largest buyer.
Bill: So taking over means zeroing out; it was the largest loss bearer at that time.
Yang Zhou: Yes, Alameda may have lost $10-20 billion at that time. But because it was a centralized institution, it had ways to "cover up," so it did not immediately expose itself. However, the shock from Terra's collapse quickly transmitted to a series of centralized lending institutions like 3AC, PayPal, BlockFi, etc.
Bill: How should we understand this transmission?
Yang Zhou: Because there were not many centralized institutions in the industry that could provide lending outlets. Those who dared to pay 7%-8% high interest to borrow money mostly had their funds linked to Terra, directly or indirectly flowing into the Anchor protocol.
Bill: So your debtors were actually investing in Terra?
Yang Zhou: Yes, both directly and indirectly. The result was that after Terra's collapse, almost all centralized lending institutions faced huge risks simultaneously.
Bill: Wait a minute, so in the last bull market, your debtors were no longer miners borrowing money to reinvest, but many people borrowed money from you and ultimately directly or indirectly went to Luna for investment?
Yang Zhou: Yes. In fact, miners began to gradually reduce leverage after December 2020. As BTC rose from $20,000, $30,000, to $40,000, they were continuously deleveraging.
Bill: Miners are actually quite risk-aware.
Yang Zhou: Yes, miners have a strong risk awareness; they have gone through too many cycles. Including this cycle, we say Bitcoin has been stuck at $100,000, one interesting reason is that miners have been selling coins at $100,000. Many miners I know have their deleveraging point at $100,000; once it hits $100,000, they start selling. So the previous cycle was stuck at $40,000, and this cycle is stuck at $100,000; there is a similarity.
So in the last cycle, miners' demand had already decreased, and the main demand for lending came from arbitrage and speculation, such as engaging in Funding Rate arbitrage. More than half of PayPal's lending portfolio flowed into this kind of "margin trading." Clients borrowed money from us, took fixed-interest financing, and then used trading strategies to seek higher returns to cover this interest. So it can be said that the lending exposure had shifted from the actual production needs of miners to arbitrage and speculative needs, which was also the process of gradually accumulating risks.
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