DeFi folding, oligopoly control, exploring new value anchors
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Deep tide TechFlow (ID: Tech-Flow)
Deep tide TechFlow (ID: Tech-Flow)
, Author: Bonnie, reproduced by Odaily with authorization.
In mid-2020, DeFi entered the eye of the storm.
This is a game that deconstructs traditional rules, and humans and codes interact directly. Centralized exchanges, investment institutions and other middlemen are left behind.
This is a technological utopia, no KYC is required, complete anonymization, developers create rules, and those who wish to take the bait.
DeFi is considered a white horse to rescue the market. After running blindfolded for more than two months, the market plummeted and Sushiswap split... It rained autumn on the hot speculative world.
When the frenzy fades, we suddenly discover that this is a folded world at the same time—big investors and scientists take away profits, retail investors often become pickpockets, and the gap between rich and poor is widening.
This is the DeFi world today, people hype governance tokens, but ignore the value of governance. The value lacks reference and loses anchoring.
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The Weightless DeFi World
Just like "Beijing Folding", which won the Hugo Literature Award in 2016, the DeFi world is also being folded in different dimensions.
In an article titled "Memoirs of a DeFi Master", a big investor reviewed the story of making $5 million on Sushiswap.
The principal of this large investor is 3 million US dollars. After liquidity mining and pledge, he earned 5 million US dollars in just 5 days.
This is the epitome of big players making money in the DeFi world. Enter in the early stage of the project, pay the handling fee in exchange for free governance tokens, and sell them in the secondary market, that is, "digging-lifting-selling".
In the past two months, the handling fee on Ethereum has been high, and the handling fee once reached 70 US dollars. "If you don't have a principal of 50,000 US dollars, don't participate in mining," a DeFi miner warned.
"The handling fee was called three or four times, and it cost nearly 500 US dollars back and forth." On September 3, an investor complained that mining on Ethereum is not a game that retail investors can play at all.
Big investors/giant whales, scientists, and retail investors are the three classic roles in the DeFi world. Big investors and scientists have occupied the DeFi highlands, while retail investors, under the influence of the sudden wealth effect, mostly choose the secondary market to take orders.
This is an infinitely nested game. Once these tokens have the support of the secondary market, they can be used as asset collateral or provide liquidity to obtain more project tokens, and so on.
Under the DeFi boom, funds entered rapidly, and the locked-up volume of DeFi projects increased by 10 times in just three months. But we have also seen that the rapid flow of funds has brought about a rapid divide between the rich and the poor.
From this point of view, decentralized finance is not decentralized, but a game that widens the gap between rich and poor.
Stani Kulechov, co-founder of Aave, said that the current DeFi distribution model is unfair and mainly serves giant whales. This is equivalent to a free lunch for the rich, but ordinary people pay for it.
Standing at the top of the DeFi pyramid are giant whales, scientists, and Ethereum miners. And the people below who bought governance tokens in the secondary market played a game of drumming and passing flowers.
Leverage is passed on layer by layer. The more popular DeFi is, the more unbalanced the distribution will be. The DeFi world is gradually losing weight, and it collapses in an instant.
Who will pay for it in the end? "When the music stops, those who are still on the stage pay the bill."
Both mainstream assets and stablecoins are locked in the liquidity pool, market liquidity is gradually drying up, and risks are transferred from top to bottom. Did you think of a familiar scene? That’s right, the DeFi world is repeating the 2008 subprime mortgage crisis.
The subprime mortgage crisis in 2008 was caused by many factors, such as excessive lending driven by the interests of mortgage loan companies, radical increase of leverage by the public, crazy packaging transactions by Wall Street investment banks, and the opening and closing of rating agencies... In essence, there was a structural bubble+ A systemic disorder of investment bubbles.
The secondary crisis of DeFi may be different. The bubble of DeFi is mainly in the secondary market, and the liquidity of coins is much higher than that of houses. What's more, DeFi only accounts for 4% of the entire encryption market.
In the sharp drop that occurred on September 4, Bitcoin fell below $10,000 for a short period of time, and Ethereum once fell by 23.7%. We saw a flash crash in the DeFi sector, and SUSHI fell by as much as 80%.
Overnight, the DeFi market fell into an ice cave. After Sushiswap, there has been an endless stream of imitations, from digging Shit to digging graves. The cycle of liquidity mining is getting shorter and shorter, the crash is getting faster and faster, and the old anchors have gradually failed.
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FOMO dominates DeFi
Liquidity mining launched in June this year has started a wave of DeFi boom.
Looking back now, it has injected new distribution mechanisms and governance models into the encrypted world, which has brought short-term prosperity to the market.
dYdX divides DeFi’s early token economic models into fee-based, governance-based, and re-mortgage-guaranteed models. Today, the main function of most DeFi tokens is governance.
What is the income or value anchor of governance tokens?
In the eyes of some practitioners, governance tokens are equivalent to free coupons and have little value.
"Based on incentives and transaction fees, YFI's reasonable valuation should be $3." Yearn Finance founder Andre Cronje said. Now, the price of YFI has surpassed that of Bitcoin.
Putting aside the question of whether governance tokens have value, the more important question is, can these governance tokens really accomplish governance?
In terms of the supply of tokens, the ownership structure of DeFi may not be much different from that of JP Morgan and Bank of America - the core team of Curve controls 71% of the governance voting rights of the agreement, and more than 13% of the voting rights of Compound are controlled by the top 10 addresses .
From the perspective of market performance, most participants are only chasing the value of the secondary market. The giant whales choose to "dig-lift-sell", while retail investors operate in the secondary market and do not participate in governance.
"The essence of the popularity of liquidity mining comes from the resonance effect formed by the arbitrage in the primary market and the superstitious belief in lock-up data in the secondary market." Yang Haipo, founder of ViaBTC, said.
The FOMO sentiment in the secondary market dominates the direction of DeFi, which almost runs counter to the original intention of DeFi, but it is in line with market laws.
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The structure and restructuring of DeFi
The outbreak of DeFi originated from the endogenous resistance of the traditional encryption world.
Both Bitcoin and the blockchain brought the possibility of creating wealth to ordinary people in the early days, which is what makes cryptocurrencies attractive to investors. Compared with investment markets such as the stock market, which are already fully mature, the encryption world creates possibilities for ordinary people, so it is popular.
In the next three to four years, the encryption world has formed a mature chain of VC, exchanges, Token Fund, and mining.
The reason why DeFi broke out is not only the premise that the DeFi industry has developed for two years and gradually matured, but also stems from everyone's higher pursuit of fairness after the "312" crash.
Fairness refers to the rules of the game that have been re-established except for the platform of the big bosses, harvesting of crops, and collusion of the strong. The "good latitude friends" who made a lot of noise some time ago is a negative example.
No matter the new or old leeks, they no longer believe in the system of the traditional currency circle. Compared with the equality of everyone in the early days of Bitcoin, after 10 years of development, the encrypted world is also facing the challenge of class solidification, and people have higher requirements for fairness.
DeFi just meets this imagination of the currency circle. The main contradiction that DeFi solves is the contradiction between investors' growing needs for fairness and justice and outdated rules.
Uniswap, which was born out of nowhere, has mixed all investors' imaginations about the decentralized world. It does not require a centralized exchange, does not require listing fees, and does not require quantitative market makers. It can be ruled by doing nothing.
The total trading volume of Uniswap exceeded 10 billion US dollars, but at this time the problem has loomed. As mentioned in the first part of this article, the subprime mortgage crisis has reappeared in the DeFi world.
However, due to the anonymous founder and other reasons, Sushiswap failed, and the management was transferred to the founder of the FTX exchange invested by Binance.
From VC, to the community, and then back to VC, DeFi is still inseparable from the endorsement of centralized institutions. The development of DeFi's decentralized governance has a long way to go-for the time being, it cannot get rid of the influence of the interests of the rule of man, and it has not attracted people who can truly participate in governance.
Hyping governance tokens while ignoring governance issues is the crux of the DeFi world. Both FOMO and rule of man are difficult to last for a long time, and they also squeezed out the last value of liquidity mining. If DeFi is to continue to develop, it needs to find a new value anchor.
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Looking for new anchors for DeFi
DeFi has brought about the rapid flow of funds, and more projects have sprung up, which we have seen. One day in DeFi, one year in the classical currency circle, one day in the currency circle, one year in the world. In just half a year, DeFi seems to have gone through the path of the traditional world for decades.
Think about it, can DeFi really change the world?
First of all, can DeFi really achieve inclusive finance? Libra, which also wants to do inclusive finance, has been suppressed by many governments, and the existence of DeFi governance tokens makes it impossible to avoid supervision. The traditional world rule is that whoever governs is responsible.
What's more, the only purpose of most DeFi projects is regulatory arbitrage, not inclusive finance. Perhaps compared to most new DeFi projects that are short-lived, we should choose projects that have been cultivated for a long time and whose products continue to iterate, such as MakerDAO.
Besides, what is the value of DeFi?
The value anchor of DeFi is not the governance token itself, but should be on-chain governance to discover greater value together.
Most of the income from this wave of DeFi boom has been captured by big investors, scientists, and graphics card miners. They follow the profit migration and have no intention of participating in the construction of a DeFi project for a long time.
“The price surge will attract users who don’t care about continuous income, provide liquidity and participate in governance.” said Andre Cronje, founder of Yearn Finance.
This is an equal but unfair game, and the next thing to do is to find a fairer governance design, not just to attract speculation.
For example, Wan Hui, the founding partner of Primitive Ventures, said that the threshold for participating in a project is to have voted on YFI’s on-chain governance, so that the traffic can be directly gathered to the people who really care about the future of YFI, all of which are high-quality traffic. There is another project that requires interaction with several staking contracts before a certain block height, which effectively prevents speculators from taking advantage of them.
After this round of DeFi heat, the market began to calm down. Fortunately, everyone has begun to pay attention to the blockchain ecology again, discovering the next value target, and looking for opportunities to participate, instead of just playing speculative games such as leveraged contracts.
