Is the DeFi industry chain a financial hype tool or a booster for economic development?
By Claire Wu, a writer from Twitter
IDO is another popular innovation in the coin industry after ICO and IEO. IDO means initial decentralized finance offering. DeFi (Decentralized Finance) has always been on the cusp of the coin industry in 2020, and the pace of development can be described as thousands of miles a day. After being hit by the 3.12 Black Swan incident, DeFi not only did not sink, but instead rebounded sharply with a stronger attitude. Stimulated by Compound's motivational mechanism, they made further strides and continued to attack the city and land.
Which is crazier, IDO vs. ICO?
How crazy is DeFi?
Compound Lending Platform: After the launch of the Coinbase exchange, its COMP token increased up to 200 times;
Yearn.finance: After the launch of the governance token YFI, the total hedging volume increased tenfold from less than $10 million to $111 million in 1 day;
MSTable stablecoin protocol: Before the auction of the project, the investment institution valued it at 15 million US dollars; after the auction, the maximum valuation reached 300 million US dollars;
AAVE Lending Platform: The platform coin Lend has increased more than 100 times from its low point to now, and it continues to rise;
... There are also many DeFi projects where the price of platform coins is rising, such as KNC, ZRX, BNT, etc.
With the deepening development of DeFi, these numbers are only the tip of the iceberg, as more public chains are joining the ranks of DeFi, including EOS, Tron, Bioriginal Chain, Boca, etc. The discussions in the DeFi group were very heated. The group was anxious to ask how to log in to the latest DeFi project to grab funds. The total market value of DeFi mortgages increased 2.5 times in about a month, breaking through the 3 billion US dollar mark in one fell swoop.
Picture source:Debank
This scene reminds me of the bustling scene when I first entered the coin industry in 2017.
In fact, many of the biggest names in the coin industry entered the coin industry when the Bitcoin price curve rushed to the sky at a 75-degree angle. This includes Binance's famous big V and 1. The wealth effect is indeed the most powerful weapon that can attract outsiders to join the coin industry. However, it was not Bitcoin that sparked the previous bull market, but ICO (also known as Western Europe).
However, the story of Western Europe was very tortuous, and the 9.4 storm we are familiar with later occurred. On the grounds of protecting retail investors, the Chinese government is trying to sweep Western Europe out of the country, shattering investors' dreams of wealth... However, cryptocurrencies are not the same as previous changes. They can silently and instantaneously cross borders. As a result, centralized exchanges such as Binance, Huobi, and OKEx took advantage of the vacuum period, took advantage of the storm, and eventually took advantage of the trend of cryptocurrency development and grew into huge entities, which can stir up wind and rain in the coin industry and make a lot of money. And will Defi, or IDO, explode this big bull market in the coin industry?
Effective incentives and friendly infrastructure detonate DeFi
Satoshi Nakamoto founded Bitcoin in the hope that the decision to issue coins will be controlled by a set procedure. If World Easy changes over time, Bitcoin must adapt and must be changed with the consent of the community. This is the meaning of decentralization. However, many decentralized cryptocurrencies are being used by centralized systems as financial tools. V God first proposed the concept of decentralized exchanges in the Reddit article “Let's Run On-Chain Decentralized Exchanges the Way We Run Prediction Markets” in October 2016. He pointed out that an ideal DEX does not require an order book (pending order book) system, and the price should be automatically adjusted entirely according to the transactions people make on this exchange. At the end of 2017, Hayden Adams developed the first DEX, Uniswap, based on the idea of God V. Since it launched on Ethereum in November 2018, its trading volume has continued to rise, and it has gained a good reputation.
Got itDecentralized exchangesAfter that, DeFi lending also came into being. As the first demonstration project for DeFi lending, MakerDAO has achieved excellent results despite a bumpy path of development. However, what broke the DeFi ceiling and set off IDOs was Compound's “borrowing is mining” incentive mechanism. The DeFi lending platform Compound distributes a certain percentage of the platform currency COMP through smart contracts to all lenders, borrowers, liquidators, etc. that contribute to loan transactions. When COMP launched on Coinbase, it was hyped up to a 200-fold increase, leading the “Wool Party” with countless coins to continue to borrow money over and over again, with the aim of earning more platform coins, COMP.
Compound-based incentives play a key role in the development of the project. AnotherDecentralized exchangesBalancer, improved on the basis of Uniswap, has added a dividend incentive mechanism for the platform currency BAL, also known as “liquidity mining.” BAL platform coins will be distributed according to the ratio of the liquidity contributed by each address to the Balancer's total liquidity to motivate community members to actively contribute liquidity and participate in community governance. According to DeBank data, Balancer's total hedging volume grew from 29 million US dollars on June 17 to about 190 million US dollars on July 17, an increase of nearly 7 times in a month.
Picture source:realt.co
Some projects have also sprung up in the DeFi market to aggregate, link, and rearrange different DeFi protocols. They are like DeFi LEGO, with the aim of obtaining the best benefits. Of course, once these LEGOs are discovered by hackers, there is a risk that they will be attacked. This has always been the biggest hidden concern in DeFi.
The popularity of DeFi is inseparable from the friendly development of some infrastructure in the coin industry. For example, decentralized smart wallets such as MYKEY, which can control accounts using traditional passwords, have appeared on the market. If the private key is lost, you can seek help from a pre-set trusted third party to recover the wallet (this function needs to be set before losing the password and mnemonic phrase). This has greatly lowered the usage threshold for outsiders. More importantly, MYKEY and the like are used as platforms to gather many of the latest CeFi and DeFi applications, such as the KEYID function deployed by MYKEY, so that wool parties no longer need to spend time studying registration and login methods for different DeFi platforms. They can access the latest DeFi apps with just one click, and even beginners can enjoy the DeFi carnival party to the fullest. At a time when many exchanges are still studying and demonstrating the viability of DeFi, institutions such as Coinbase, MYKEY, Matcha, and Tiger Sign Exchanges that have set up early and are deeply involved in the DeFi field will rise in this round of DeFi frenzy.
Photo Credit: MYKEY
At this point, we can already see a complete industrial chain in the DeFi field, from project token issuance and financing → provision of transaction channels → mortgage loans to further finance and provide greater liquidity to the market.
Can DeFi help blockchain projects develop in the long term?
For a project that wants to make a difference in the blockchain field, the hardest part is the cold start process of the project. The project's platform coin bears the heavy responsibility of motivating community members to contribute to the project, and is the link for the development of the entire project. In the past, some projects needed to attract people to launch the project, spending dozens of bitcoins to be listed on centralized exchanges with “very good” liquidity. If careless, it would cause disputes with the exchange. Investors' rights protection, and it is normal for currency prices to fall freely from high places. However, falling currency prices will in turn discourage the community and put project development at a standstill. This is the most painful experience for many blockchain projects in a bear market.
The advent of Ethereum made it possible for ICOs to raise capital. Now, decentralized exchanges allow the project party to create its own trading pair pool for its platform currency (most commonly providing an equal value of Ether and the project platform coin), and then complete the exchange on the wallet. Theoretically, as long as the capital pool is guaranteed to be large enough, unlimited liquidity can be generated. Many project parties believe that the design of this self-built fund pool and algorithmic liquidity mechanism is fantastic, solving the problem that the liquidity of platform coins in transactions and their currency prices may be controlled by some centralized exchanges. Furthermore, the incentive mechanism of Compound and Balancer also served as an example for the cold start of the project.
Earlier, we saw that MakerDAO combined financing with the lending platform Papechain to advance the income of musicians from Spotify is a very good example of empowering entities. Recently, many platform coins with application value have joined the ranks of collateral loans to facilitate financial access. For example, Firstpool provides a 40% secured KEY loan plan for CoinKey, and the loan interest rate is only 5%. In the future, it is believed that more different types of lending activities can be a booster for the development of blockchain projects.
Possible Negative Effects of Financial Hype Surrounding DeFi
Seen from another perspective, it is undeniable that many new things must go through a wild and barbaric growth stage. Both extremes of development may exist. Taking Uniswap as an example, in addition to helping real projects establish tradable capital pools, there are also many dark aspects that go against the original intention of kindness. Uniswap is also known as a big casino. Coin issuance is crazier than ICO. The increase in tokens reached 100,000 times in 6 days, and the one-hour run to zero set a new record. Who ran faster between these unscrupulous project players and the Wool Party? Therefore, investors need to measure between risk and return.
Photo Credit: brave.com
Although the DeFi bubble can attract a large amount of traffic to many projects and successfully start a cold start, many people doubt whether these wool parties can turn into long-term users. V God is one of them. Accepted in early JulyComparative》At the time of the interview, he believed that the high-yield liquidity mining model was unsustainable. In mining for the sake of mining, repeated staking is to obtain more valuable platform coins, causing demand for platform coins to surge, thus driving their price to rise. When another platform's platform coin has room to add value, the trading volume may plummet due to the loss of the Wool Party.
The sharp rise in currency prices will also lead to arbitrary short selling by bears. Recently, Chainlink was shorted by a report issued by an agency. Using this, Link's short selling has recently increased astonishingly, and earned considerable profits. In traditional financial markets, there are many examples where institutions are first shorted and then short sold, causing the “building” of the physical business to collapse. Therefore, developing more online and offline application scenarios is a top priority for blockchain projects. Project parties should guide users' attention to project business development, use this as currency price support, form an anchor of value, and create a virtuous cycle, rather than focusing on irrational hype about platform coins.
The biggest contribution blockchain brings us is the use of code to replace the “trust” provided by human governance in the real world, improve efficiency, and reduce the cost of human misconduct. Bitcoin is the founder of decentralized finance. After 10 years of development, Bitcoin has gained the trust of more and more countries and people around the world. Many world-renowned financial institutions, such as J.P. Morgan Chase, Fidelity, Standard Chartered Group, etc., are providing or will provide different services to the crypto sector. DeFi is the same as Bitcoin 10 years ago and Ethereum ICO 3 years ago. The idea is in the same vein. It will use code technology to jointly build a financial ecosystem in the decentralized cryptographic field. Costly centralized processing procedures will be replaced, and institutions that are unaware of the changes brought about by this wave and participate in it will slowly be marginalized. Only those that keep pace with the times can continue to swim well in the wave of decentralization.
This article is an original work of the blockchain media “Comparative”. Reprinting requires authorization, and violators must be investigated.
