Cao Yin: The new trust model of blockchain will reshape the traditional financial industry
Huobi University Huobi Education
foreword
Huobi University Huobi Education
In the past 3 months, DeFi has set off a wave of blockchain financial applications, from compound's liquidity mining detonating the industry, to sushiswap's dramatic plot, and then to uniswap's transaction volume is almost on par with CEX head. Innovation and development in DeFi is making strides. However, the recent adjustment of DeFi has also made many people question whether DeFi has passed, and whether the application is valuable? Let's take a look at the true value and future of DeFi from the macro level of blockchain technology changing traditional finance with Cao Yin, Managing Director of the Digital Renaissance Foundation.
Faculty Profile
Core point of view: The blockchain's revolution in finance starts from the core part of the pyramid, which is the clearing and settlement infrastructure. In the blockchain network, the concept of liquidation does not exist. All transactions are "cleared when they occur". There will be massive disruption in the financial industry.
Faculty Profile
Cao Yin, managing director of the Digital Renaissance Foundation, Acala Network consultant, has been investing and researching DeFi since 2017, and has focused on investing in Polkadot DeFi projects since 2019, investing in Polkadot cores including Acala, Darwinia, Bifrost, Zenlink, etc. ecological project.
The following is the essence of Cao Yin’s courses, organized by Huobi University.
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The new trust model of blockchain technology will reshape the traditional financial industry
The traditional financial industry has not changed since its inception. Now all kinds of Internet finance, including P2P, etc., are still essentially based on the current banking system business, and have not formed their own foundation. The main reason lies in trust. production methods. A very important job in the financial industry is to set up trust, organize trust, and then pass on trust. Trust is still very centralized in the financial industry. And now the blockchain can build a new form of trust that does not require pyramid-style endorsements. We call it point-to-point decentralized trust, which will bring opportunities for rebirth to the financial industry.
The blockchain will definitely change the underlying structure that the financial industry is very familiar with - the basic form of clearing and settlement. The financial innovations we have seen before, whether it is Internet securities companies, online account opening, online custody or robo-advisors, including P2P, these businesses are actually the business of finance at the application layer. The most important thing in finance is the underlying clearing and settlement , and this underlying clearing and settlement is basically monopolized by one or two institutions. Whether it is a brokerage or an exchange, his role is to be an agent of trust.
The blockchain's revolution in finance starts from the core part of the pyramid, which is the clearing and settlement infrastructure. In the blockchain network, the concept of liquidation does not exist. All transactions are "cleared when they occur". There will be massive disruption in the financial industry.
There is also a subversive and revolutionary financial blockchain direction, such as Bitcoin and Ethereum. The core of this disruptive financial blockchain direction lies in the way assets are created. Assets are created on the blockchain, and the original financial work is completed on the original blockchain clearing and settlement, transaction, and information matching platform. We call this kind of DeFi. These two financial blockchains or financial blockchain innovations will coexist for a long time, or will coexist forever.
DeFi uses the public chain as the infrastructure, a series of open financial applications characterized by non-permission and non-permission open source, or open financial protocols, and the creation of virtual assets, such as Bitcoin, so some people have always said that Bitcoin is The earliest DeFi. There is also financing. For example, the early ICO is actually a kind of DeFi, but ICO has many problems, because of the absence of supervision and the lack of self-discipline in the industry, including the fact that there is no technical and commercial foundation in the early stage, resulting in a large number of ICOs. Air coins, scam coins, financing coins, and pure financing escape coins have appeared.
The DeFi ecosystem based on DeFi, or based on the public chain, is actually relatively complete. In the current alliance chain, all operations need to be approved by members of the alliance chain before they can be used and developed and combined. In addition, the underlying assets are actually assets in the original traditional financial world, but digitized through the alliance chain. In the future, I very much approve of the use of cross-chain technology to open up the financial business of the alliance chain, circulate or even issue directly on the public chain. In the future, it may even be possible to cross-link assets on the public chain through cross-chain technology. In the future, the alliance chain and the public chain will be combined, that is, DeFi and CeFi will be combined.
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The Heart of DeFi: Permissionless, Composable, Automated
The essence and core of DeFi is not necessarily decentralization. Decentralization is only the purpose of DeFi. What is the core of DeFi? I call it permissionless, composable, automated.
The definition of DeFi is currently in the process of constantly forming and adjusting changes. The decentralized network does not necessarily only have the blockchain, and other types of decentralized networks may appear in the future.
In my opinion, DeFi is the use of open source software and decentralized networks, plus financial products, to become a transparent financial protocol movement that can operate without intermediaries and centralized operations. Turning the entire finance from a product into an agreement, anyone can run this agreement, and everyone creates assets and exchanges assets based on this mutually recognized agreement, which is very similar to a series of Internet protocols in our Internet. This kind of financial agreement movement makes finance become a real Internet-based, native information-based asset and business format that can be freely disseminated like information, without intermediaries, and not monopolized by any institution.
Combinable: A large number of DeFi protocols are like Lego blocks. For example, a project combines oracle machines, DEX, and digital assets to form a decentralized financial management. Composable builds on license-free, very magical creations similar to genetic engineering.
Automation: I prefer to call automation P2C, in the blockchain, people and protocols conduct transactions. For example, Uniswap, which is more like a P2P trading method, acts as a decentralized exchange, but in essence, assets are stored in the agreement pool of Uniswap's AMM automated market maker. This kind of transaction we call Renhe agreement. what is the benefit? Because the protocol is automated, and the protocol is unstoppable. Therefore, P2C has actually surpassed P2P in the automation of DeFi. All interest rates, currency prices, and capital prices are determined by algorithms, automatically obtained, or determined by community voting governance. At the same time, there is no need for continuous operation, because everyone is over-collateralized, there is no need to provide relevant credit, and there is no centralized counterparty risk. The only possible danger is that the protocol has a loophole and is hacked. But code problems can always be solved, because the code is open source. You can keep updating the iterative code.
Decentralization: Decentralization is difficult to forcefully stop, so even if political problems, political risks, or geopolitical risks occur, it will not affect DeFi on the blockchain. In the current international environment, DeFi has more significance. Companies such as Morgan Stanley, Goldman Sachs, IBM, and Microsoft are all researching DeFi. At present, Microsoft has launched a service that can embed DeFi into the underlying business logic of the centralized bank.
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Introduction to DeFi Basic Protocols
MakerDAO: MakerDAO is a decentralized stablecoin platform. I prefer to call it a decentralized pawnshop. The mechanism is that users over-collateralize digital assets (mainly ETH), mint according to the mortgage ratio and decentralize the US dollar currency value 1:1 Dai, the essence of the standardized currency, is actually a standardized bond. Such mortgage casting, loan repayment, and the two-way process of taking WBTC are completed by the agreement, which is a typical and purely decentralized early central bank.
The protocol of MakerDAO is still very simple, but what kind of assets can be accepted in it is more complicated. For example, it is up to the community to decide whether to accept some non-mainstream digital currency assets as collateral to create DAI. At the beginning, it was the mainstream Bitcoin, Ethereum, etc., and then USDC and non-mainstream ERC assets were added. This is the process of collateral expansion. Who determines the process of collateral expansion? It is proposed by those who hold Maker governance tokens in the community, voted by the community, decided by the community and vetoed by the community in the future.
Compound: Everyone says that Compound is a mortgage market, or a mortgage lending market. My definition of Compound is a decentralized currency market. The mechanism is that users over-mortgage digital assets into the smart contract fund pool, and borrow various digital assets according to the mortgage ratio, and the assets in the mortgage can earn interest and profit.
Uniswap: Uniswap is a decentralized exchange, but my definition of it is a decentralized liquidity trading market. The mechanism is that the liquidity market maker sends a group of digital assets to the liquidity pool at a ratio of 1:1, and the trading users follow the trading curve in the liquidity contract and use ETH as the trading medium to trade assets.
Among them, through centralization and decentralization, such as the price arbitrage between Huobi and Uniswap, the constant product trading formula or constant product liquidity market-making on Uniswap keeps the prices of different assets on the external market , Correcting the asset prices in the Uniswap constant product liquidity trading pair in this way is actually a formula that requires positive feedback from the outside to make it return to the constant product liquidity market-making formula.
DeFi is actually inseparable from CeFi. If there is no CeFi to complete large liquidity transactions to generate constant, we think it is a fair market price. The price generated by the constant product of liquidity on Uniswap can easily deviate, and cannot return to equilibrium price. DeFi and CeFi are two sides of one body and depend on each other.
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DeFi explosion: asset scale expansion and distribution are fair, and the industry will develop healthily
DeFi has undergone changes like the Big Bang from the diversity of protocols, types of products, scale of assets, and scale of types.
For example, Uniswap does liquidity and transactions, Maker does stablecoins, Aave does mortgage lending, WBTC does BTC mapping on Ethereum, Curve does stablecoin swaps, Synthetix does synthetic assets, Compound does mortgage lending like Aave, Although balancer is similar to Uniswap, its liquidity curve is different from Uniswap, and it is another kind of swap.
Since its establishment, Huobi University has been committed to cultivating top talents in the industry. Yu Jianing, President of Huobi University, has repeatedly stated that in order to seize the opportunities in the blockchain era, the most important thing is to realize the cognitive upgrade and effectively grasp the "blockchain thinking", which is a set of Internet thinking and financial thinking. The complex thinking system of , industrial thinking and community thinking, and Huobi University’s series of courses are based on this logical system, hoping to help great innovators in the blockchain field "pull through the fog ahead and go through Looking at the present in the future", using the power of "blockchain +" to effectively help all walks of life to achieve industrial upgrading.
It can be seen that the current DeFi assets are locked in different protocols very evenly, which means that there is no excess return in any protocol in DeFi, so the locked assets of DeFi will be evenly distributed to different types of DeFi In the agreement, this means that the capital distribution effect of DeFi is very fair, and the friction between the circulation of funds across protocols is very low, so that the funds will always be relatively evenly distributed between different protocols, making the information flow of DeFi and The assigned roles of trust have been performed very efficiently.
