Originally Posted by Babywhale, Foresight News

Originally Posted by Babywhale, Foresight News

Recently, Paradigm was nicknamed "betrayed the revolution" because it changed the introduction of the official website homepage from focusing on cryptocurrencies and Web3 to a "research-driven technology investment company". Although Paradigm may have temporarily diverted its attention due to various reasons such as LP pressure, its recent actions have hinted at its long-term layout in the Web3 field after DeFi.

DeFi's Leverage Game

The DeFi track on the chain has always been one of the first choices for practitioners in the traditional financial field to start a business. A few years ago, as a blue ocean that longed for liquidity but suffered from the lack of perfect on-chain facilities, DeFi can be said to have completed the process of rising and exploding in a very short period of time, and to a certain extent, boosted the development from the second half of 2020 A full-year bull run through 2021.

Many people may be convinced of the assertion that "DeFi has brought about a bull market", but the logic may not be understood by everyone.

Although it cannot be said that it is the whole reason, the last round of bull market was largely boosted by the word "leverage". Whether it is Terra, which evaporated $30 billion overnight, or institutions such as Three Arrows Capital and Celsius that went bankrupt, it was because of excessive leverage that triggered a chain reaction after the market fell.

In addition to centralized institutions, the "leverage" on the chain should not be underestimated. During the 2021 Bitcoin price drop from close to $65,000 to around $30,000, the total liquidation volume of DeFi lending protocols reached billions of dollars. And there is no shortage of Paradigm behind these large-scale DeFi agreements whose TVL has reached billions or even tens of billions of dollars.

In the previous article "Paradigm Investment Landscape: 70 companies invested in 4 years, covering infrastructure, DeFi and NFT" (https://foresightnews.pro/article/detail/18571 ), we sorted out the projects invested by Paradigm, Except for some infrastructure such as public chains, wallets, and DAOs, almost all other investments are related to finance. And as an early investor in Uniswap, Compound, and MakerDAO, Paradigm almost "single-handedly" created the liquidity infrastructure on Ethereum.

According to DefiLlama data, during the peak period, the TVL of Uniswap, Compound, and MakerDAO on Ethereum reached 10.24 billion US dollars, 11.977 billion US dollars and 18.9 billion US dollars respectively, accounting for almost half of the 110 billion US dollars TVL peak period of Ethereum. ".

As a former Goldman Sachs foreign exchange trader and co-founder of Coinbase, Paradigm co-founder Fred Ehrsam must have a deep understanding of the impact of liquidity and leverage on financial markets. Compound has attracted a large number of institutional funds to enter the market through higher returns and lower interest rates compared to traditional financial markets, plus no cumbersome procedures. It provides liquidity to obtain income, or seeks leveraged transactions; MakerDAO even allows mortgages Mainstream assets such as ETH and WBTC directly "print money". If it is said that Compound and Aave only put large funds into circulation in order to obtain stable returns, the leverage effect of MakerDAO can be said to be more obvious.

Paradigm co-founder Fred Ehrsam

The stablecoin DAI minted by the MakerDAO protocol has achieved almost no slippage swaps with USDT, USDC and other stablecoins minted by mortgaging an equivalent amount of U.S. dollars through DEX such as Uniswap and Curve, so that DAI has actual purchasing power. The impact is transmitted to a large number of assets that support DEX.

Although Uniswap itself has no direct relationship with the matter of increasing leverage, when the loan agreement is liquidated, it is obviously too inefficient to transfer the liquidated collateral to the exchange and then sell it. Uniswap just provides a direct call contract The place where the collateral can be liquidated.

Just like the subprime mortgage crisis in 2008, it was precisely because a large amount of leverage was imposed on real estate that loans were granted to many people who did not have the ability to repay the full amount. Eventually, when house prices fell, a chain reaction led to the outbreak of the crisis. In DeFi, due to the existence of liquid mining, many users repeatedly mortgaged and borrowed the loaned assets to obtain higher mining income in order to obtain higher income, and finally "stomped" when the price of mortgaged assets fell.

"Replaying the old tricks" in the NFT field?

In the whole year of decline in 2022, there has not been a large amount of liquidation in the field of DeFi lending. After a round of baptism, many DeFi users have deeply realized the horror of leverage. Although it does not mean that it cannot be increased, they need to always pay attention to the leverage ratio and collateral situation. Although there are still many innovations such as GMX in the DeFi field, it is clear that this kind of left-footed right-footed spiral may not happen again.

So the question is, where is the next growth point?

After carefully studying Paradigm's investment in the NFT field, we discovered the NFT trading markets Blur, OpenSea, Magic Eden, and NFT fragmentation protocol Tessera in its portfolio.

If you compare DeFi, you will find that the two basic elements of leverage (Blend) and trading markets (Blur, OpenSea, Magic Eden) are already in place.

If you want to replicate the "leveraged bull market" brought about by DeFi in the NFT field, there are some shortcomings before Blur appeared. Before Blur, OpenSea almost set up a template for other NFT trading markets, whether it was Magic Eden, LooksRare, X2Y2, Element, almost all inherited the OpenSea model: a pure peer-to-peer trading model.

As a simple example, if BendDAO+OpenSea is used to replicate the Compound+Uniswap model, it is obviously not convenient in terms of convenience. Regardless of the auction mechanism of BendDAO liquidation, assuming it uses OpenSea for liquidation, the liquidator needs to place an order on OpenSea and wait for the buyer or someone to provide his favorite bid. The reason why the process is so complicated is that OpenSea has not worked hard at the level of "transaction" in essence, and users seem to be accustomed to the idea that "non-homogeneous tokens should be this kind of transaction mode".

The appearance of Blur has changed the pattern of all this. The author guesses that Paradigm should be a treasure when seeing Blur, because its model is exactly the "trading market" that Paradigm needs. Blur omits many elements of NFT market transactions that were originally considered conventional, and only uses a price list and Bid pool to present the buying and selling orders we see in order book transactions.

Such a model has changed a deep-rooted view in the NFT field: In the past, we thought that the floor price was the lowest price of a certain NFT series, but Blur told us that the first price in the Bid pool below the floor price has a deep buying order This is the reasonable price at which this NFT series can be sold.

The emergence of Blur makes the financial asset attributes and transaction attributes of NFT itself infinitely magnified. As for what the picture looks like and what features it has, the proportion of these features in the total amount is not important at all. Traders only need to know the price and the depth of buying and selling. Can. On such an infrastructure, any liquidation that occurs in Blend can be directly implemented in Blur, forming a closed loop.

But before that, Paradigm actually tried another solution: NFT fragmentation.

Tessera, formerly known as Fractional, has a total financing amount of tens of millions of dollars. Its highlight moment occurred in 2021. The owner of the Shiba Inu in the expression pack Doge cast the original image of Doge as an NFT and fragmented it. At that time, according to the fragmented ERC- Calculated by 20 tokens, the highest value of this Shiba Inu photo has reached more than 200 million US dollars.

But just two weeks ago, Tessera announced it was winding down all operations. We can now analyze various reasons for its failure to succeed in an "afterthought" method. The author believes that the most fundamental reason is that its mechanism is too complicated. For Web3 investors, Blend's buy-now-pay-later and installment plans may be more Simple and clear; perhaps, the sentiment of the market tells us that NFT needs to be presented as a whole. In any case, NFT fragmentation is still a good attempt.

In addition to finance, what is left?

In addition to Paradigm, many entrepreneurs in the Web3 field have turned their attention to the more popular fields such as AI. In the current Web3 field, it is difficult for DeFi to have breakthrough innovations, the future of NFT is uncertain, and it is difficult to see a narrative that is as attractive to funds as DeFi in other fields. Many people have begun to doubt whether Web3 can create another bull market as vigorous as 2021.

Thinking about it carefully, besides NFT, there are almost no Web3 native assets that can add extremely strong transaction attributes. Many new things are just some innocuous improvements on the basis of existing products, and NFT itself attracts funds. Power is also very limited without new powerful narratives.

Paradigm understands the financialization of Web3's native assets, but as a concept of "fire once", it may be difficult for NFT to independently support a bull market. The current hot concepts Layer 2, ZK, social, games, etc. do not seem to see innovation at the asset class level.