Saturday, October 31, 2020

What have we learned from this round of DeFi ups and downs?


JPMorgan Chase once called Bitcoin a fraud in 2017, which is worse than the Tulip bubble; but now it says that Bitcoin will compete with gold and has huge room for long-term growth. From MLM scam to have the opportunity to shake the important tradition of innovation finance, currency in bits represented by the block chain line of rapid development of industry, but also will have some outlet from time to time.

Recently, the market has temporarily calmed down after the DeFi boom, and new hotspots are still gestating but not flourishing. This article will sort out and reflect on the DeFi wave caused by liquid mining this year, and explore the next possible outlets and investment opportunities.

DeFi is booming, whose cheese is moved?

DeFi is not a new concept. The current DeFi leader MakerDAO was established in 2017. The originator of DeFi, BTS, has existed in 2014, but the DeFi fire is in 2020.

In mid-April, the decentralized lending compound launched the governance token COMP, surpassing Maker in less than two months to become the No. 1 in DeFi market value, officially kicking off the DeFi 2.0 era. In the same period, Uniswap, a decentralized trading platform, has sprung up, hitting centralized exchanges with no listing fees. During the same period,, the biggest dark horse of the year, was born. After 30 days of the 8-year market of Bitcoin, it skyrocketed more than ten thousand times in 43 days. The total amount of DeFi locked up has also increased by about 20 times from the beginning of the year. When it was in its prime, DeFi successfully triggered FOMO among investors in the currency circle, and even attracted the attention of regulators such as the US SEC.

However, since mid-September, major DeFi leading projects have led the decline, with higher points such as COMP, UNI, and YFI all falling by about 70%, and DeFi suddenly burst like a bubble. At the same time, counterfeit coins are rampant, the founders are cashing out, the project lacks code security audits, and smart contracts have backdoors... all kinds of strange phenomena are emerging in an endless stream. DeFi is instantly criticized and short-selling by the currency circle community.

DeFi is booming, but what caused this wave of craze to fade quickly? Whose cheese was moved again and was hit? In fact, there are many reasons, but if you sort out market trends and news, you will find that the most direct counterattack starts with the entry of centralized exchanges.  In order to avoid capital outflows and missing hot spots, CEX first launched the DeFi tokens in mid-to-late August, and then specially opened the DeFi section, and even lowered the listing conditions in the face of the popularity, boosting the DeFi boom to reach its peak, but it also accelerated The DeFi boom has receded.

Since September, many CEXs have entered liquidity mining to conduct DeFi wealth management on behalf of users. This has greatly reduced the barriers to participation and risks for traders, making the previously risky profitable DeFi project gradually return to the normal range of returns, and the original "28th effect" has become "participation."

In addition, with the stagnation of currency prices, liquidity mining has entered a vicious circle: under the "dig-sell-withdraw" model, large households earn tokens by providing liquidity, and then withdraw and sell, which once again creates selling pressure on the currency price . Buyers in the secondary market are locked in one after another, coupled with the continuous exposure of negative news, market confidence has been greatly lost, and the DeFi boom has been declining.

Only bubbles? Face up to the financial innovation behind DeFi

Why didn't Maker and earlier BTS lead the DeFi boom? DeFi is just another financial bubble, does it have no value?

In fact, the rise of this round of DeFi is not accidental, but a financial innovation driven by technology and products. The temporary retreat of the DeFi boom is due to previous excessive speculation, but it does not mean that there is no support.

Let's start with financial innovation. The lending leader Compound has innovatively introduced governance tokens. Both borrowers and lenders can obtain governance tokens by providing lending assets and borrowing assets. The introduction of governance tokens stimulated enthusiasm for market participation. Both the number of asset offerings and the number of asset lending in the Compound application have increased significantly.

In fact, the essence of Compound business is margin trading. The active application of Compound makes digital asset trading more active. Users can borrow digital currencies from Compound applications at low interest rates, and then apply them to digital asset transactions that can obtain higher returns. Data shows that Uniswap, the leading DEX, saw a substantial increase in transaction volume during the same period.

Uniswap [constant product] model is used, so that the user can token exchange directly in the exchange pool, not only to change the previous order book post easy to mold type, but also reduces the market-making threshold, so that each user can become one The market maker of the trading pair and shares the fee income. This is very attractive to borrowers who have successfully financed money in Compound. Uniswap's innovative mechanism has seized some of the users and traffic of traditional centralized exchanges to a certain extent. This is also where Uniswap is more successful than previous DeFi projects. is also financially innovative. As a decentralized financial platform, it covers complex functions such as aggregated liquidity pools, leveraged trading platforms, and automatic market making. It can combine the tokens lent by investors with dYdX, Aave and Compound. Automatically allocate and transfer between to achieve the highest profit.

This series of financial innovations have jointly contributed to the DeFi boom. These innovations have important value. They successfully migrated the original centralized financial facilities to the blockchain. This is the most important significance of this round of DeFi boom for the development of the blockchain.

 The Future of DeFi Driven by Technology and Products

Let's answer the last question again: Why did DeFi's financial innovation get together in 2020?

In fact, it is not enough if there is only financial innovation without corresponding blockchain technology and ecological development. Take the compound we mentioned first as an example, the oracle is indispensable. The oracle provides on-chain prices that can be quoted by smart contracts for various DeFi applications such as decentralized lending. Users of decentralized lending can lend or borrow based on the price of the oracle, so as to prevent the borrowing price from deviating from the market price and causing losses. It can be said that the maturity of common tools such as oracles provides important support for the large-scale emergence of DeFi applications.

The role of the oracle is actually more powerful than imagined. At present, the locked assets in DeFi applications are still mainly on-chain assets. However, in the future there will be more off-chain assets on the chain, and the oracle can realize on-chain and off-chain data. Interaction, which will enable the application scenarios of DeFi to be expanded more widely.

With the gradual completion of the issuance of governance tokens in the DeFi project, decentralized autonomy (DAO) is also an important technical support for the future development of DeFi. DAO is not a new concept. In 2016, The Dao, a DAO organization based on the Ethereum blockchain platform, was born, but due to the vulnerability of the smart contract, huge amounts of funds were transferred by hackers. DAO can realize the establishment of an online version of the company's equity structure, token conversion mechanism, voting, job appointment, financing and accounting on the blockchain. When the DeFi project enters the community governance model, DAO needs to provide more mature and complete governance functions, only in this way can it ensure a more vigorous development of DeFi.

In addition, the interconnection of all things and the interconnection of all chains are not only the theme of the times, but also the bottleneck that the blockchain industry urgently needs to solve. DeFi projects are still mainly concentrated on the Ethereum chain. In the future, the development of cross-chain technology is important and urgent. Cross-chain technology allows more private chains and public chains to interoperate, breaks the island effect, supports more assets on the chain, meets more real transaction needs, and promotes financial prosperity on the chain.

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