Behind the DeFi mania: Is it real demand or a speculative bubble?

特邀专栏作者

2020-06-23 11:23 (UTC+8)

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The recent continued popularity of the DeFi market and the fanatical pursuit of high-yield products by users have aroused the thinking and discussion of many crypto practitioners. Is the surge in users, capital and popularity the real demand of the DeFi

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Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), Author: Riyao, published with authorization.

Editor's Note: This article comes from

Chain News ChainNews (ID: chainnewscom)

, Author: Riyao, published with authorization.

The popularity of the DeFi market continues to rise, and a large number of users and capital enter the market

The DeFi (Decentralized Finance) market is currently the hottest market in the encryption field.

Since the second half of last year, DeFi applications such as assets (DAI, USDT stable currency, etc.), lending (capital pool lending, leveraged tokens, etc.) and transactions (AMM, DEX, derivatives) have followed one after another, playing various As a new trick, the market enthusiasm for DeFi has always been at a high level. In particular, the recent launch of the decentralized lending agreement Compound and the implementation of the "loan mining" mechanism have greatly stimulated the market's pursuit of DeFi, and the capital absorbed by the DeFi market has also risen sharply at a speed visible to the naked eye.

According to DeFi Market Cap data, the total market value of the top 100 DeFi tokens by market value has exceeded US$6.5 billion (6.553 billion). From the beginning of June (2 billion) to the present, the total market value of DeFi tokens has increased by 228% within half a month. Among them, Compound has made remarkable contributions.

As of 12:00 on June 22, the market value of Compound was as high as 3.119 billion US dollars, accounting for nearly half (47.6%) of the total market value of DeFi tokens, far surpassing Maker, which had previously topped the list, and currently ranks No. 1 with a market value of 509 million Two, the 0x protocol is the third (350 million).

Since Compound started distributing the governance token COMP on June 16, affected by the token distribution mechanism of "borrowing and mining", the number of Compound's core locked tokens (ETH, BAT, etc.) has shown a significant increase. A week ago, The total locked assets of Compound are less than 100 million US dollars, but now it has exceeded 500 million US dollars. Coinbase Pro, FTX, Poloniex and other exchanges have also announced the listing of COMP.

Compound once again detonated the DeFi market, and its frenzy is comparable to the ICO market in 2017. Most of the users who are rushing in are also interested in its super high return. According to the statistics of the Dapptotal website, Compound’s 7-day return rate is as high as 425%.

Industry insiders refer to this kind of DeFi product market that obtains token incentives as Yield farming, and users who come to participate in activities to seek income are called Yield farming.

V god questioned high interest rate DeFi products

The vigorous DeFi market has attracted the attention, thinking and heated discussions of many encryption practitioners.

On June 21, Vitalik Buterin, the founder of Ethereum, tweeted, "Honestly, I think we are overemphasizing those fancy DeFi products that can bring super high interest rates. Interest rates that are much higher than the traditional financial system are essentially either Just a short-lived arbitrage opportunity, or it comes with unstated risks.”
Immediately afterwards, Vitalik published another tweet "Rectify the name of DeFi". He said that DeFi (decentralized finance) should not be for optimizing yield. Instead, what it should do is to consolidate and improve some important core components, such as synthetic tokens (aka stablecoins) of fiat currency and some other major assets, oracle oracles (for prediction markets, etc.), DEX ( Decentralized exchange), privacy protection, etc.

In Vitalik's view, the benefits of encryption technology that users want to enjoy (simplified international payments, removal of traditional centralized financial attributes, value storage that prevents interception...) coupled with the financial attributes of existing assets, stablecoins ( Stablecoins) can provide.

Vitalik’s two tweets triggered a series of discussions around the value and risks of DeFi applications. These are the thoughts of front-line practitioners in the blockchain and cryptocurrency fields. After combing and analyzing, Lianwen divided them into two categories: Large category:

One is to analyze the core problems existing in the current DeFi market and the huge risks it faces.

The other category emphasizes the value that DeFi applications bring to the encryption field and its promising prospects of replacing traditional financial institutions;

Viewpoint 1: DeFi "income mine" is a high-risk zero-sum game

On the one hand, many people agreed with Vitalik’s statement in the comment area, believing that the current high-yield DeFi products attract a large number of arbitrageurs, not the real needs of the DeFi market, and this high-interest rate zero-sum game After all, it is unsustainable, and user investment risks are extremely high.

Encryption enthusiast and commentator YOSHIDA KATSURO pointed out that although DeFi is now a hot word on youtube, it does not stem from its mass adoption, but from the group of people who profit from price increases. But he believes that DeFi is worse and riskier than the traditional banking system when the price of the underlying asset plummets.

Crypto enthusiast RealityAbsorber thinks it's a very stupid idea to pour millions of dollars into some poorly audited/vulnerable code. And, most absurdly, you might get nothing, since almost all such DApps have master keys, a kill switch, and/or a central controller. Users are actually operating in an application that is advertised as decentralized but is actually a centralized system.

Web developer Enkhmanal also added that Compound and other Ethereum lending, all of these DeFi protocols have smart keys (Smart Keys), which can make changes to smart contracts. If there is a centralized entity behind the protocol, then they It’s not actually DeFi.

In addition, Wang Qiao, the product manager of the former encrypted data statistics website Messari, retweeted Vitalik's views and published a series of comments. He believes that many users may not understand the "revenue mine" and its source of income.

If you spent two days farming in Defi's "yield mine" but still don't know where the income comes from, then you are the source of the income. Until now, DeFi has been a zero-sum game, and anyone claiming it is not a zero-sum game is either insincere or simply does not understand DeFi.

In Wang Qiao's view, users who participate in this type of game must consider their own long-term competitive advantage.

For "high-yield agriculture", the advantages mainly come from two points: 1) automation; 2) low capital cost. A year from now, this type of game will be commoditized by people who can program and have huge balance sheets.

Yang Mindao, the founder of the decentralized financial DeFi and currency protocol platform dForce, believed from the very beginning that Compound's "loan mining" model is a high-risk investment behavior for speculative arbitrage, and released a series of tweets on this.

He said that Compound's "loan mining" has completely become a place for speculative arbitrage, as expected. Arbitrageurs in Compound's liquidity pool crowd out actual lenders. These arbitrageurs are mainly attracted by the return on investment higher than 100%.

They are not real users of DeFi, nor are they interested in becoming long-term participants in the DeFi protocol. Most of these users request COMP compensation every 6-12 hours and sell immediately. Their strategies are all focused on ROI and cash returns, just like Same as mining pools.

In his view, in the end, arbitrageurs are likely to surpass the designers of the entire Compound protocol, unless Compound makes timely adjustments to mechanisms such as the token distribution plan.

DeFi and privacy technology developer Rodrigo Pacini pointed out that the current "high yield" of "yield mines" is not the norm.

Rodrigo Pacini believes that under normal circumstances, 200% annual returns are not sustainable in a free market. Nobody in their right mind would want to pay 200% per annum to borrow money. The current 24-hour annualized rate of return in Curve is exactly 200%.

Viewpoint 2: DeFi "income mining farm" has its existence value and sustainability

On the other hand, many encryption enthusiasts affirmed the necessity and value of such "fancy DeFi products", and pointed out that compared with the traditional financial system, DeFi applications have many natural advantages: for example, cross-border payments are cheaper , lower handling fees, allowing users to enjoy a borderless, permissionless financial experience, etc., and some people pointed out that its high interest rate is also natural and reasonable to some extent.

Gnosis product, Ethereum core developer eric.eth responded to Vitalik, saying that the income mine allows open source projects to achieve profitability through token incentives. So, while he agrees that this should not be the ultimate development goal, he believes it is an important funding experiment.

Liam Horne, co-founder of ETHGlobal and L4, commented, "But we cannot underestimate the incentives created by such DeFi applications, which have attracted a new wave of capital, developers and ideas to the entire field." In response, Vitalik quickly responded, "Agreed, but we cannot rely on such projects, and must pay attention to the systemic risks that occur."

Blockchain developer SHA256 believes that "society needs such DeFi products" because people in the middle and lower classes can no longer afford large assets like real estate. Prices are high, inflation is increasing, and people want things that add value and are affordable.

Although Bitcoin is suitable, the wait is too long. Defi just shortens the waiting time and allows people the opportunity to get rich quickly within a month. DeFi products are a suitable "parallel economy" against assets and stocks, and there is a huge demand.

Many netizens pointed out that these "fancy DeFi products" have made important contributions to the popularization of the encryption field, and are the main way for more ordinary people to participate in the encryption field.

“Fancy DeFi products” are a must for mass crypto adoption. What ordinary people need is money, not boring encryption functions. I like both encryption research and token incentives.

Yield (Yield) is obviously an easy way to lead people into the crypto world without knowing it. Nothing offers an equally strong value proposition, and after all most people don't care about privacy or decentralization.

Some other netizens pointed out that this "ultra-high interest rate return" is not completely "unreasonable".

Encryption investor and developer, founder of EthereumPrice (@0xEther) said that he only agrees with part of what Vitalik said, because he believes that there is a reason for the low interest rate in the traditional financial system, reflecting the huge cost of the entire fragmented system , in this system, the cake of each layer is divided by many people, but DeFi does not have these.

Netizen "cro36" believes that the current interest rate "half is reasonable", because DeFi can avoid many hidden bank fees and regulatory requirements, and these will lead to higher interest rates.

Netizen "Greg" even pointed out that this kind of "expensive high interest rate" is not all a flash in the pan. He said that in many cases, the interest rate can be higher than the federal funds and can be maintained for a period of time. Even on a global scale, they should be higher than high-yield savings accounts.

DeFi "income mine" is a new type of ICO?

When discussing the investment frenzy brought about by DeFi "yield mines", many practitioners regard it as the ICO market in 2017, and believe that it also has a high risk of bubble bursting.

Encrypted lending practitioners (@crypto_lending) said that Defi is the new ICO, just like people are scrambling to use ICO in 2017, we have seen similar market sentiment in the DeFi field, people are scrambling to enter the blockchain project, it is worth it The caveat is that many of these projects will eventually collapse, just like the 2017 bubble.