Backlashed by DeFi, Ethereum Jedi fights back
Editor's Note: This article comes fromDeep tide TechFlow (ID: Tech-Flow)Editor's Note: This article comes from
Deep tide TechFlow (ID: Tech-Flow)
Deep tide TechFlow (ID: Tech-Flow)
, Author: Ye Xiaofeng, reproduced by Odaily with authorization.
Ethereum is finally up!
Over the past two days, Ethereum has gained 12%.
Investors finally breathed a sigh of relief. But this seems to be far from enough, because, compared with the crazy market of DeFi on Ethereum, ETH has been standing still for a long time.
I believe that at this moment, there must be countless questions lingering in investors' minds. This article will mainly discuss the following issues of concern to investors:
Why is it said that DeFi has become a burden on the Ethereum network?
Is the "fat protocol" regarded as the bible by the blockchain world obsolete?
Why did Ethereum suddenly soar? Where are the opportunities for Ethereum in the future?
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DeFi is moving away from Ethereum
Why did the price of ETH stagnate for a long time when DeFi was hot?
In a nutshell, DeFi protocols on Ethereum began to rely less and less on ETH.
In the early days, MakerDAO, as the most mainstream lending protocol, only accepted ETH as collateral to generate Dai. After the advent of Compound and Aave, ETH served as the standard currency of the DeFi market for a period of time.
With the vigorous development of the DeFi market, more and more tokens have become native assets.
On November 18, 2019, MakerDAO officially released multi-collateral Dai. In addition to ETH, it also allows tokens such as BAT, USDC, WBTC, KNC, and ZRX to be used as collateral to issue stablecoins on the network, which weakens ETH to a certain extent. influence.
Subsequently, multi-asset mortgages became mainstream, and even Synthetix appeared.
Unlike most DeFi applications built on the Ethereum base chain, Synthetix does not use ETH as collateral, and only supports the mortgage of its native token SNX for the issuance of synthetic assets.
Lending protocol Aave also launched an unsecured peer-to-peer lending service in July.
Financial innovation has gradually moved DeFi away from ETH, especially the key innovation that made DeFi take off-liquidity mining.
On June 15, 2020, Compound launched a liquidity mining mechanism to distribute its governance token COMP, which was the beginning of a great DeFi boom."Yield Farming"。
Subsequently, Balancer, Curve, Bancor, Thorchain, mStable, bzx, Kava... have launched liquidity mining mechanisms.
In order to chase these token rewards, investors actively provided liquidity to these DeFi protocols, and DeFi began to take off like a rocket.
As more and more DeFi protocols issue governance tokens and distribute these tokens to liquidity providers, a new Meme term has been born in the cryptocurrency community
Yield Farming, Yield means harvest or income, and Farming is farm planting.
As the name suggests, it means that cryptocurrency investors invest their funds in different DeFi protocols to earn the maximum return. Cryptocurrency investors compare themselves to "Yield Farmer",and it may be more appropriate to explain it in Chinese——狗胡 and Wool Party .
Yield Farming further pushes DeFi away from ETH and even hurts ETH.
Yield Farmer attempts to earn more speculative tokens — such as COMP or BAL — through liquidity mining.
From the perspective of economic benefits, participating in mining with BAT, ZRX, USDT, USDC and DAI is more attractive than ETH.
Take the hottest Compound as an example. The BAT giant once monopolized COMP mining, and then the official urgently revised the token distribution mechanism. Stablecoins became the main battlefield, and ETH has been tepid.
Currently, in Compound’s deposit and loan pool, ETH only accounts for 19.15% of total deposits and 2.45% of total loans.
In liquidity mining, the role of ETH is more due to the use of gas for handling fees.
However, this does not necessarily mean that ETH is generating a lot of new demand. Because most DeFi users are also investors in ETH, many of them can use their existing ETH to pay transaction fees.
DeFi did not make Ethereum perform miracles again.
William, the chief researcher of OKEx Research, believes that if ETH wants to benefit from DeFi, DeFi must be large enough to stimulate the market demand for ETH. For example, the ICO wave in 2017 stimulated the market demand for ETH, pushing ETH to a market high of $1,300.
At present, the total circulation of ETH is 111 million, while the lock-up value on DeFi is only 4 million, which contributes little to the market demand of ETH, so the performance of ETH is still flat.
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The more successful DeFi is, the more dangerous Ethereum is
DeFi not only failed to bring about the revival of Ethereum, but also made the Ethereum network more congested and more expensive. Moreover, the increase in transfer fees may drive away real DeFi users.
According to a Coin Metrics report, DeFi has pushed up Ethereum transaction fees to their highest level since 2018, and has begun to endanger the security of the Ethereum system.
On July 22, the founder of Ethereum, V God, warned on Twitter that if no countermeasures are taken, high fees will undermine network security.
Jan Xie, chief architect of Nervos, believes that the more successful DeFi on Ethereum is, the more dangerous Ethereum is.
"Ethereum faces a different challenge, which we call the "heavy asset problem." Ethereum pays miners in ETH to incentivize consensus and keep the network secure. However, Ethereum hosts many different tokens, and these tokens Benefiting from Ethereum’s security does not contribute to the growth of Ethereum’s security. Instead ETH holders have to pay the ongoing storage cost for it (paid to miners by creating ETH).”
In his view, the more successful these non-ETH tokens are (such as DeFi), the more attractive Ethereum is to attackers. At the same time, the security of the network does not increase proportionally to the total value of all tokens stored on the network.
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Are Fat Protocols Obsolete?
In August 2016, Joel Monegro of USV, an American investment fund, published an article called "Fat-Protocols", which is called "Fat Protocol" in the Chinese world.
The "fat protocol" theory has aroused widespread discussion, and was once considered the investment bible in the blockchain world. You can even attribute the public chain investment boom to the fat protocol theory.
"Fat Protocol" believes that the blockchain and Internet value capture models are different, and most of the value in the Internet era is captured by the application layer, such as Google, Facebook, Amazon, Ali, Tencent, etc. The underlying protocols such as TCP/IP and HTTP that provide support for the Internet cannot capture value.
In the blockchain era, the value will be concentrated in the shared protocol layer, and only a small part of the value will be distributed in the application layer. Thus was born the terms "fat protocol" and "thin application".
According to the fat protocol, since the success of the application layer will drive the speculation of the protocol layer, the market value of the protocol will always grow faster than the total value of all applications built on it. The value growth of basic protocol layers such as Ethereum should be much faster than that of DeFi. The value of the class Application Layer.
But the fact is that the value growth of DeFi tokens far exceeds that of ETH, and the total market value of all existing ERC20 tokens has exceeded the market value of Ethereum.
Kyle Samani of Multicoin Capital used Augur as an example in the article "Aggregation Theory, Thin Protocols, and Recentralization: Augur Edition" to express a view that applications will steal the value of the protocol, and it is difficult for the protocol to stop this theft.
When applications occupy most of the traffic of the protocol and must pay a large amount of fees to the protocol, the applications will tend to fork the protocol to obtain greater benefits.
William, the chief researcher of OKEx Research, believes that the analysis scenario of "Fat Protocol" is outdated.
"The "Fat Protocol" believes that the reason why the protocol is "fat" and the application is "thin" is due to two points, one is the data sharing at the protocol layer, and the other is the introduction of protocol layer tokens. But now we can clearly find that the data sharing Sharing does not mean the sharing of traffic, because at the application layer, the functions and operations of each project are mixed, and traffic sharing in the true sense cannot be realized.”
Second, the application layer and the protocol layer have produced a certain degree of decoupling between users and funds.
In William's view, there has been a clear decoupling of the connection between the application layer and the protocol layer in terms of users and funds-"People can issue a large number of stablecoins on Ethereum, raise funds in the lending market, and even in the DEX transactions, but neither will significantly increase the market demand for ETH, and the consequence of this disconnect is that the market cap of the application layer exceeds the market cap of the protocol layer.”
Analyst Mike disagrees with the conclusion that "fat protocol" is outdated solely from the "DeFi craze". Just as FCoin trading, that is, mining, also led the trend for a while, but it still ended in failure, relying on "innovations" such as liquidity mining Whether booming DeFi will become the next FCoin remains to be seen.
He believes that from a longer-term perspective, DeFi has already bubbled, and the value of the protocol layer has not been fully discovered, such as Ethereum has not really exerted its strength.
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Ethereum gives a killer
Being backlashed by DeFi, Ethereum will not sit still, it has given the killer - EIP-1559 and ETH 2.0.
In his tweet on July 22, Vitalik expressed his concern that the high fees would damage network security, and at the same time, he also proposed a solution—EIP-1559.
EIP 1559 will change the current fee structure of Ethereum into two types:
The biggest highlight of the basic fee (BASEFEE) is that this fee is not used to reward miners, but is burned directly, which avoids inflation and may even reduce supply.
Tip (GAS_PREMIUM), which is used to reward miners. In the case of no congestion, it only needs to be enough to compensate the miners for the risk of digging out uncle blocks (for example, 1 Gwei). During the period of transaction congestion, the highest price auction mode will be used , increase the Tip fee to make your own transactions be packaged faster.
EIP 1559 uses a mechanism similar to Bitcoin's difficulty adjustment to increase or decrease the value of BASEFEE. When the market demand is high, the basic fee (BASEFEE) will start to rise, and the more congested, the faster the fee will rise.
Additionally, prior to EIP-1559, transaction fees technically did not have to be paid in ETH, which threatens the reserve status and monetary premium of the native currency when users can use any token (e.g. stablecoins) to pay transaction fees. After the implementation of EIP-1559, the BASEFEE part of each transaction will be calculated in ETH and will be destroyed.
To sum up, EIP 1559 mainly does two things:
A market dynamic price mechanism is established for block transaction packaging.
Mandatory use of ETH as the transaction fee, and destroy most of the ETH in the transaction fee.
This will reshape the economic ecology of Ethereum.
In the past, whether it was the rise of stablecoins, the hot liquidity mining of DeFi, or the funds on Ethereum, they did not give value to the entire Ethereum protocol layer, and even threatened the security of Ethereum. success, the more dangerous Ethereum is” situation.
EIP 1559 changed all that.
Destroying BASEFEE means paying equivalently to the entire Ethereum network, and all ETH holders will benefit. EIP 1559 solves the "tragedy of the commons" problem on Ethereum by increasing the scarcity of ETH to pay for externalities.
EIP 1559 is equivalent to the tax system of the Ethereum economic system, which ensures that all citizens (ETH holders) can obtain the value of Ethereum by default, whether it is participating in Staking or DeFi, games, or funds. , all usage behaviors of Ethereum will increase the scarcity of ETH and enhance the value of the protocol layer.
Of course, it is still unknown whether EIP 1559 will be adopted in the end. According to the news disclosed by Vitalik in the WeChat group, EIP 1559 already has a test network, and the first phase of Ethereum 2.0 includes 1559.
In addition, the high-profile Ethereum 2.0 is also on the way.
On July 23, Ethereum officially issued a document stating that the next multi-client test network, Medalla, will be launched at 9:00 pm on August 4, Beijing time, which will mark the last step before the launch of the Ethereum 2.0 main network.
