Author: Jiang Xiaoyu; Editor: Black Soil; Producer: Carbon Chain Value (ID: cc-value)
In the cryptocurrency industry, change is like a tornado. You dont know when it will come, but it will always come suddenly one day, and then cause a violent wave. This was true for Staking in the past, and it is true for DeFi today.
The March 12 crash four months ago made many people lose confidence in the industry, especially DeFi. Due to the short-term deep jump in the price of cryptocurrencies, MakerDAO, the largest project in the DeFi field at that time, had a debt position (that is, insolvency), which initiated the auction of MKR. The whole process was extremely chaotic. Not only did some people auction off the assets at zero cost, but some even called out that the project was coming to an end.
More than two months ago, dForce, the largest DeFi project in China, was stolen by hackers for 25 million US dollars. Although the funds were recovered afterwards, it still made the participants of the project sweat. After that incident, people in the industry conducted in-depth discussions on the security of DeFi, and their doubts and reflections on DeFi were far greater than their optimism.
Whether it was 4 months ago or 2 months ago, people would not have thought that DeFi would become the biggest explosion point of this year with high expectations.
01 A Brief History of DeFi: From MakerDAO to Compound
The history of DeFi is actually very short, less than 3 years since the birth of the first DeFi application MakerDAO.
In December 2017, MakerDAO, the worlds first DeFi application, was officially launched. The app targets the stablecoin market, allowing users to over-collateralize Dai, a stablecoin against the U.S. dollar. Just over half a year later, as of July 2018, the lockup volume on MakerDAO exceeded $150 million.
Encouraged by the success of MakerDAO, DeFi applications have sprung up like mushrooms after rain. In 2018, well-known DeFi applications Compound, dxdy, Uniswap, Dharmar, Augur, and WBTC were launched; in 2019, Synthetix, DDEX, dForce, Veil, Kyber, and InstaDapp were launched; in 2020, Loopring, Balancer, and Aave were launched one after another, and within a short period Within a short period of time, it occupied the top few positions in DeFi applications. In the same year, Compound listed Coinbase, and distributed 42% of the total governance tokens in the model of borrowing and mining, which set off a frenzy of lock-ups in DeFi. At the end of June 2020, the mortgage amount of the entire DeFi network reached 1.87 billion US dollars.
For quite a long period of time, MakerDAO has been the sole king in the DeFi field, and its locked-up market value has accounted for more than 80% of the entire DeFi ecosystem for a long time. This is not only because it is the earliest DeFi application, but also because the stable currency is the underlying service of finance, which enables the project to widely penetrate into other DeFi projects. MakerDAOs dominance was not broken until Compound launched the loan-to-mine token distribution model in June 2020, which used the profit-making effect to encourage a surge in online lock-ups. However, at present, Compound’s current lock-up volume only accounts for 34% of the entire DeFi network, while MakerDAO’s lock-up volume accounts for 30% of the entire network. Compound has not pulled MakerDAO a large distance. Considering the unsustainable model of sweeping wool, it is not impossible for the lock-up volume of Compound to be overtaken by MakerDAO in the future.
In the field of cryptocurrency, the explosion of any theme is inseparable from the pushing hands of famous capital. DeFi is no exception. Before the rise of DeFi projects, several well-known capitals had already set their sights on this field, such as a16z, Polychain, Paradigm, Dragonfly, Coinbase, 1confirmation, etc. Whether it is in the top DeFi projects such as MakerDAO and Compound, or behind some DeFi projects that do not seem to be very successful now, there are these crypto capital giants.
As early as three years ago, MakerDAO had not yet been born, and the DeFi field could be said to be blank, while centralized exchanges made a lot of money in the crazy digital currency market in 2017. At that time, domestic investors focused on investing in the next Binance. Hundreds of thousands of centralized exchanges popped up, and hundreds of millions of funds poured into this track. However, although the flowers were blooming and the heat was like a fire cooking oil back then, few of these exchanges have survived and really made money.
Different from Chinese investors, foreign investors at that time believed that the next opportunity in the encryption field was either in the next-generation public chain or in decentralized finance. Looking through the investment portfolios of the above-mentioned crypto star investment institutions in recent years, you will find that they basically invest around the above two themes.
Why do they make such judgments? The author once listened to a lecture given by an investment manager of a16z in China. He believes that blockchain technology itself is a low-efficiency technology, and its real role is to provide trust that traditional Internet giants cannot provide, rather than blindly chasing TPS. At the current stage, it is not only unrealistic to allow large-scale DApp applications to appear on the public chain, but also does not play the unique role of blockchain technology at all, so he believes that this direction is controversial. But the DeFi field is different. Compared with other DApps (such as some kind of so-called decentralized games), as a financial service, every byte of a DeFi application bears a higher value; in addition, it can also solve some CeFi (centralized Finance) cannot solve the problem of trust. In this sense, it may be a bit whimsical and wasteful to use the blockchain to run large-scale DApps; but it is perfect for DeFi.
In addition, some foreign investment managers have expanded the meaning of DeFi. They believe that Bitcoin itself is a kind of DeFi, that is, a decentralized currency, and this is the most fundamental infrastructure of DeFi. With a decentralized currency, you can build a centralized stable currency, a decentralized lending market, and a decentralized exchange... The entire idea of DeFi is in line with the idea of Bitcoin, and finally the cryptocurrency will be built The overall financial ecology.
02 Sudden explosion, is it a bad thing for DeFi?
Since its inception, the market value of DeFi has been rising continuously. In January 2018, the total lock-up volume of DeFi exceeded US$100 million; in June 2019, the total lock-up volume of DeFi exceeded US$650 million; in February 2020, the total lock-up volume of DeFi exceeded US$1.2 billion. Although it then plummeted to US$500 million in March 2020, by the beginning of July, the total locked position of DeFi had risen to US$1.85 billion.
Looking at the time axis, although DeFi has exploded in the near future, its growth is a long-term process. Even without the borrowing is mining launched by Compound, the general trend of the total lock-up volume of DeFi continuing to rise is still very obvious. Compared with other hype themes in the cryptocurrency field, DeFi is more like a famous champion after getting good grades in the exam, rather than boasting like some public chains before handing over the report card, and the last chicken feather outbreak Hu Xiucai.
In addition, from a macro perspective, Ethereum 2.0 is gradually approaching, which will bring new development momentum to the DeFi ecosystem. Huobi Mining Pool said in an interview with Carbon Chain Value: The substantial improvement in the performance of the Ethereum system is a necessary condition for DeFi to grow from a niche application to a mass application. Its high-frequency scenarios may also bring new ways to play for DeFi. At present In addition to the asset sector, lending sector, and liquidity sector, there may be new tracks in the DeFi field, such as deriving a new DeFi sector to serve Ethereum’s own Staking function.”
What needs to be vigilant is that in the field of cryptocurrency, once a certain concept becomes popular, there will be a bunch of imitators immediately. These imitators also have capital and a whole set of industrial chain packaging to tout behind them. The model and code may completely copy the successful projects, just change the name and go online to harvest leeks. DeFi cannot escape this fate. At present, there are already a bunch of similar projects waiting to be listed, and they want to make a lot of money while the concept is still fresh and hot.
In the short term, such speculation will hurt DeFis reputation. Just like the concept of Staking in 2019: Staking is originally a good thing, but hundreds of projects have been packaged in the name of Staking and harvested leeks together, which has made more people suspicious of PoS projects. But in the long run, after the short-term hot hype bubble passes, the long-term value of DeFi still exists. A considerable part of the traffic imported by Wool into DeFi projects will be converted into long-term users, and the DeFi track will continue to flourish.
03 Compound is not the next Fcoin
Despite this, many people still have doubts about Compound’s launch of the “borrowing is mining” model. For the Chinese currency circle, this model is very similar to the former Fcoin. With the incentive method of trading is mining, the exchange was very popular in 2018, and its single-day trading volume even surpassed that of Binance, becoming the biggest dark horse in the exchange that year. However, as large investors began to sell and smash the market, the price of Fcoin’s tokens plummeted, plummeting within a week, and the trading enthusiasm also dropped sharply. This further led to a reduction in token dividends and an even lower price, leading to a terrifying death spiral. At the beginning of 2020, the exchange was revealed that 13,000 bitcoins could not be redeemed, and the founder Zhang Jian ran away. After that, Fcoin basically faded out of the industrys sight.
Some people have raised questions: Is it possible for DeFi, which has exploded with a similar model, to follow the old path of Fcoin? In my opinion, it is unlikely.
First of all, the Compound team is very smart. Their liquidity mining, that is, the tokens distributed by borrowing and mining are essentially governance tokens without any economic role. The money earned by the Compound project is still owned by the company, and Comp token holders cannot get any income from the tokens in their hands. The tokens distributed by Fcoin back then were tied to the profits of Fcoin itself. This radical incentive method further promotes the rise of the currency price when the currency price rises (traders rush into the transaction in order to get more tokens, thereby further promoting the rise of the currency price); When it falls, it further promotes the decline (traders sell tokens and leave the market one after another, and are unwilling to trade on the platform due to losses, resulting in reduced dividends and continued decline in currency prices). The Compound team dismantled the relationship between coins and dividends, thus canceling this terrible positive feedback.
As for why the Compound team separates governance rights from dividend rights, different people have different opinions. From the perspective of incentive mechanism, it avoids the dangerous design of Fcoin; from the perspective of supervision, Compound’s approach makes its tokens different from stocks, which can help it evade the supervision of SEC; from the perspective of selfishness, although governance rights It is separated, but the project income is still owned by the company, which is a good thing for both the capital and the founding team.
Secondly, the tokens that the Compound team distributes to the community every day are limited. The total number of Compound tokens is 10 million, of which 4.2 million will be distributed to the community through liquidity mining. Starting in June 2020, Compound will distribute 2,880 COMP tokens every day for the next four years. Let’s do some calculations: After the price of the coin on Coinbase skyrocketed and plummeted, the price of the COMP token basically stabilized below $200. That is to say, the daily distribution of liquidity mining to the market does not exceed 600,000 US dollars. If the price of COMP falls, this dividend income will also decrease.
Readers who are familiar with the Bitcoin mining mechanism know that Bitcoin’s daily block rewards are limited. The greater the computing power of the entire network, the fewer coins each machine can mine. This is the same in Compound mining: the more people who are tempted by the $600,000 to borrow money, the less profit each borrower can get. In this way, there will be an upper limit threshold for the number of people who sweep wool and the number of locked positions. If this threshold is exceeded, it is not worthwhile to come to sweep the wool. After all, borrowing and borrowing on Compound requires corresponding costs. This is different from the original Fcoin - the original Fcoin gave no upper limit to the amount of mining that was given every day, which eventually brought the recovery to an extremely crazy level.
At present, we can see that the locked position of Compound is basically stable at 600 million US dollars, an increase of 5 times compared to before the launch of liquidity mining. It did not skyrocket like the original Fcoin did, and then fell rapidly when it reached the peak. On the contrary, it gave people the feeling that no matter how much it increased, it could not go up, but it could not fall either.
Therefore, of course, Compound has ignited the entire DeFi circle because of its money-making effect and the surge in locked positions. But no matter from the perspective of economic mechanism design or the current performance of Compound, it is far healthier than Fcoin back then.
Of course, this does not mean that Compound has no worries. Meng Yan, who is famous for designing token economic models in the circle, believes that the proportion of Compound shareholder tokens is too large (about 24% of the total), and the cost is too low (only 13.85 US dollars). In addition, the distribution ratio of Compound founders and team tokens is too large, accounting for nearly 26% of the total, and the cash cost is zero. Although it is unlocked for four years, it will be shaken if it is not managed the whole community.
04 DeFi will return to long-term value
The destination of DeFi is not to lose ground after short-term hype, but to return to long-term value.
Since its inception, DeFi players have never been ordinary retail investors, but large players or even institutions. Even for giants like Compound, before launching the loan-to-mine strategy, their users had no more than 1,500 users, but their locked positions reached as much as $100 million. The situation of other DeFi projects is similar, there are not many users, but each user locks more assets on average.
Therefore, DeFi is more like an exquisite concept or toy pursued by the upper class in the encrypted world, and the vast majority of retail investors in the currency circle have no access to it. This sudden detonation made some retail investors who had never felt the taste of DeFi began to try to enter DeFi. Lets not discuss whether these wool parties can be converted into real users, but only talk about the purpose of education and promotion, which has actually been achieved.
At the end of June, Huobi held a cutting-edge dialogue on DeFi. In that conversation, dForce founder Yang Mindao said that the explosion of DeFi is actually a process of quantitative change leading to qualitative change: From stable currency, lending to DEX, AMM, the popularity of DeFi has been detonated, mainly because the infrastructure of DeFi has already been established. The foundation is laid, and a very strong protocol network interconnection is established through composability. As the cornerstone of DeFi, the stable currency has grown rapidly since 2018. On this basis, the lock-up volume of DeFi has only begun to increase. Growing rapidly.
How a thing will develop in the future, you have to ask where it came from. DeFi, which is cooked slowly, will not lose its long-term value and direction due to short-term hype. In the future, how DeFi will challenge the centralized financial service providers in the cryptocurrency field is a long-term follow-up point of view.
Another point worthy of long-term follow-up of DeFi lies in its exploration of decentralized governance. Vitalik, the founder of Ethereum, made a series of remarks on Twitter this year, making a highly condensed summary of the history, current situation and future of cryptocurrency development. He pointed out that from 2008 to 2020, the 12 years of the encryption world were almost all about exploring finance; however, in the next decade, the development narrative in the encryption field will change. In his view, decentralized community/governance/DAO, as well as decentralized anti-censorship information publishing and communication, are the next very important work.
I will discuss this topic separately in an upcoming article. A point of view can be thrown here: I think DeFi may be the best testing ground for DAO (decentralized self-organization). At present, the common problem of DAO is the lack of scenes, lack of reliable and sustainable income, and it can even be said to be generated by love. However, people need to eat to live, and organizations must have cash flow to survive in the long run and continue to expand. If the current DeFi is a toy for the upper class in the encryption field, then DAO is even more a utopia for the upper class intellectuals in the encryption field. In order to really promote DAO, it is necessary to find a matching scenario and run through the business layer.
Now, DeFi has business scenarios. Whether it is providing stable currency or providing a place for lending, it is always truly meeting the needs of this group of people or another group of people. DeFi also has cash income, such as project commissions, or service fees charged to users. In addition, the concept of decentralized finance naturally fits with the concept of decentralized governance. This time, Compound distributed governance tokens through the method of borrowing and mining, which is a big step for the next DeFi project to explore decentralized governance.
The exploration of Compound may not be successful, but for DAO, its significance is extraordinary. If we dare to make bigger imaginations, perhaps, an economic system that replaces the corporate system is already in the bud.
05 CeFis response and layout
Corresponding to the fiery DeFi is how CeFi people deal with it.
In the cryptocurrency space, CeFi primarily refers to centralized exchanges. Of course, centralized lending companies and centralized stablecoins are also suffering from the impact of DeFi, but they are not as strong as centralized exchanges. This is because the business of centralized lending companies is not purely encrypted assets. Miners not only mortgage Bitcoin to lend stablecoins to pay electricity bills, but also mortgage mines and mining machines to borrow money. Once it involves off-chain business, DeFi will be difficult to implement. As for the centralized stable currency, USDT has firmly established its position as the leader of the rivers and lakes, and it is still difficult to be shaken by the decentralized stable currency for the time being.
At present, the depth and liquidity of decentralized exchanges have surpassed that of second- and third-tier exchanges. In 2019, the market share of decentralized exchanges was only 0.2% of that of centralized exchanges; by 2020, this figure has risen to 1%. In this regard, it is impossible for centralized exchanges to be unaware. So how do they cope?
Overseas exchanges represented by Coinbase have already participated in the deployment of DeFi in advance, and can even be said to be the direct promoters of the DeFi wave. In fact, there are not a few well-known centralized exchanges abroad, such as BitMex, Kraken, Gemini and so on. Why can only Coinbase stand out in the DeFi layout?
First of all, compared with other exchanges, Coinbase has a very deep relationship with crypto investment giants. The top investment institution in the industry, a16z, invested in Coinbase as early as 2013, and then followed up with the investment twice; and the founder of another well-known investment institution, Polychain, was originally the No. 3 employee of Coinbase. Throughout history, Coinbases investment portfolio overlaps with those of a16z and Polychain. However, these two major investment institutions have the earliest judgment on DeFi and the heaviest chips. In this way, it is not surprising that Coinbase, which has in-depth exchanges with these two major investment institutions, took the lead in deploying DeFi among all centralized exchanges.
Secondly, Coinbase itself is an early participant and beneficiary of cryptocurrency. Their founding team has a relatively cutting-edge understanding and outlook on the form and service methods of future financial services. In April 2018, Coinbase announced the establishment of its investment arm, Coinbase Ventures, whose motto is invest in companies that are building an open financial system. DeFi fits the theme and is exactly what it wants.
Coinbases deployment of DeFi is divided into two aspects. One is to invest in promising DeFi projects as an investor; the other is to launch high-quality DeFi project tokens. ——This is quite a feeling of being both an athlete and a referee. As early as 2018, Coinbase invested in Paradex, a decentralized exchange project. Subsequently, it invested in DeFi projects Compound, Dharma, UMA, InstaDapp, etc. These projects have achieved good performance so far. In addition, Coinbase is also one of the most friendly centralized exchanges for DeFi concept tokens. Up to now, a total of 26 projects have been launched on Coinbase Pro, among which 7 projects, MKR, ZRX (backed by the decentralized trading protocol 0x), DAI, LOOM, KNC (Kyber), COMP, and REP (Augur), all belong to DeFi concept. For Coinbase, which is prudent in listing its currency, this shows the depth of its deployment in DeFi.
From Coinbase, we can see that DeFi not only cannot defeat CeFi; on the contrary, some CeFi are also the first to deploy DeFi, and even the promoters of the concept. Their benefits from DeFi are no less than those from sticking to CeFi.
Due to differences in investment logic and thinking, domestic investors were not keen on investing in DeFi at first, which has led to the fact that the current DeFi field is almost dominated by foreigners. In the list of the top 30 DeFi locked positions, there are very few Chinese projects among them. However, this situation is currently changing.
Chinese exchanges represented by Huobi are accelerating their deployment on DeFi. In February 2020, Huobi launched the Bitcoin token HBTC on the Ethereum blockchain. HBTC strictly abides by the 1:1 reserve guarantee, that is, every time 1 HBTC is issued, its asset depository address will have 1 BTC asset guarantee, and users can use HBTC to exchange 1:1 with BTC at any time.
Bitcoin tokens based on the Ethereum blockchain are a basic track in the DeFi field. The two chains of Ethereum and Bitcoin cannot be directly connected, so assets cannot be transferred directly. Before the introduction of Bitcoin tokens, the Ethereum-based DeFi ecosystem mainly used ETH as collateral; however, compared with Bitcoin, the market value of Ethereum is still too small. If only this asset is used as the underlying asset of DeFi , the market space of DeFi will naturally be limited. Therefore, the introduction of Bitcoin tokens on the Ethereum blockchain has become a focus of attention.
The early entrepreneurs in the DeFi field were the first to see this business opportunity. In October 2018, Bitgo, Kyber and Ren officially announced the creation of a brand new ERC20 token WBTC. In early 2019, this product was officially launched, and was soon added to the ranks of collateral supported by MakerDAO. Up to now, the locked position of WBTC has exceeded 80 million US dollars.
The HBTC launched by Huobi directly stimulated the recent rapid growth of WBTC. In addition, imtoken, the largest Ethereum wallet in China, also launched its own bitcoin token imBTC. Both HBTC and imBTC are accepted as collateral by dForce. At the beginning of February 2020, the locked positions of HBTC and imBTC both exceeded 500 BTC, and both are continuing to flourish.
In addition to directly launching the underlying products required by the DeFi ecosystem, Huobi is also participating in the construction of the DeFi ecosystem in an all-round way. In terms of mining business, Huobi Mining Pool is continuing to mine and cooperate with high-quality new DeFi projects. For example, on July 8, it opened the lock-up mining of the new oracle project Nest. In terms of improving the ecological infrastructure, Huobi Wallet recently announced that it will provide Huobi Global Station transaction data to Chainlink, the worlds largest oracle project, and provide price feeding services for any DeFi application connected to Chainlink. It is worth mentioning that this is the worlds first large-scale exchange running Chainlink nodes.
In addition, like Coinbase, Huobi is actively participating in DeFi investments. In April 2020, dForce, the largest DeFi project in China, announced the completion of a strategic financing of US$1.5 million, and Huobi Capital participated in this investment. At the peak of dForce, its lock-up volume once ranked fourth in the decentralized lending market, which is also the best result achieved by domestic DeFi projects so far. Although the hacking incident at the end of April dealt a heavy blow to dForce, fortunately, the stolen crypto assets worth $25 million have been recovered. The dForce project was also announced to be restarted.
Although the dForce incident is not complete, it is the beginning of a brave attempt by domestic DeFi projects. Huobis investment in dForce is also an important event for domestic centralized exchanges to step into DeFi. If DeFi is a long-term hot spot, then domestic exchanges must not be absent from this track, and must speed up their deployment.
06 Summary: Some discussions on the limitations of DeFi
In this article, we have made an overall review of the DeFi industry and recent hotspots, and also made a more optimistic outlook on the future of DeFi. However, in the summary part, the author would like to talk about the limitations of DeFi.
The biggest limitation of DeFi is the current limitation of cryptocurrency: it is separated from the entity and speculation prevails.
3.12 made many people in the circle realize that compared with digital gold, global computer and other visions, the status quo of cryptocurrency is more like a super big casino, and the layers of beautiful visions are the magnificence covered by the hype. veil. At present, cryptocurrencies are separated from entities, and most of them lack usage scenarios, so they also lack an anchor of value. Some people say that valuing cryptocurrencies is an art, not a science, which is too friendly a way of saying. In fact, valuing cryptocurrencies is a speculative metaphysics, which is full of capital hype and manipulation of large funds. Ordinary investors will get bloody in it if they dont pay attention.
The biggest use of DeFi, which was born on top of cryptocurrencies, is to provide new ways of playing and new tools for speculators in the field. Its ceiling is naturally constrained by the underlying cryptocurrency. As long as cryptocurrencies are not connected to entities for a day, DeFi cannot expand its narrative, and thus its valuation. No matter how new the gameplay is, it is just a novel tool inside the cryptocurrency casino.
Now, in order to hype DeFi projects, some project parties even refer to traditional financial circles such as the stock market and bond market as CeFi, and their DeFi valuations must directly benchmark against the valuation of the entire traditional financial circle. This is pure nonsense, and investors should be vigilant about it to avoid being deceived.
Apart from this biggest limitation, DeFi also faces several inherent problems:
First of all, after every financial business becomes bigger, it will involve compliance and anti-money laundering issues. As the volume of DeFi is getting bigger and bigger, should we do anti-money laundering? How to do anti-money laundering? This question needs to be considered by practitioners in advance.
Second, DeFi is facing increasingly serious security issues. With the increasing market value of DeFi, it has attracted the attention of many hackers. Hunters hiding in the dark stared at high-value DeFi projects day and night, trying to find hunting opportunities from their mistakes, and shot and stole valuable assets above them in one fell swoop.
Generally speaking, the DeFi field is developing in a promising direction. As one of the few new tracks in the cryptocurrency field that has proven its own logic, let us bless it.
