Is the DeFi industry chain a financial hype tool or a booster for economic development?

Author: than push freelance writer Claire Wu

IDO is another innovation that has swept the currency circle after ICO and IEO. IDO means Initial Decentralized Finance Offering. DeFi (Decentralized Finance) has always been the outlet of the currency circle in 2020, and the development speed can be described as a rapid development. After the 3.12 Black Swan incident, DeFi not only did not sink, but rebounded sharply with a stronger posture. Under the stimulation of Compound’s incentive mechanism, it further advanced and continued to conquer cities and land.

IDO vs. ICO, which one is crazier?

How crazy is DeFi?

Compound lending platform : After the Coinbase exchange is launched, its token COMP will increase by up to 200 times;

Yearn.finance : After the launch of the governance token YFI, the total lock-up volume increased from less than 10 million US dollars to more than 10 times to 111 million US dollars in one day;

mStable stablecoin protocol : Before the project bidding, the investment institution was valued at USD 15 million, and after the bidding, the valuation was up to USD 300 million;

AAVE lending platform : The platform currency Lend has increased by more than 100 times from its low point to the present, and it continues to rise;

…… There are many other DeFi projects that have skyrocketed platform currency prices, such as KNC, ZRX, BNT and so on.

With the in-depth development of DeFi, these numbers will only be the tip of the iceberg, because more public chains are joining the ranks of DeFi, including EOS, Tron, Bytom, Polkadot, etc. The discussion in the DeFi group is very hot, and the group friends are eagerly asking how to log in to the latest DeFi project to raise funds. The total market value of DeFi mortgages has increased by 2.5 times in about a month, breaking the US$3 billion mark in one fell swoop.

Image source: Debank

This situation reminds me of the lively scene when I first entered the currency circle in 2017.

In fact, the time when many big names in the currency circle entered the currency circle were when the Bitcoin price curve rushed to the sky at a 75-degree angle, including Binance’s famous big V Ho Yi. The wealth effect is indeed the most powerful weapon that can attract outsiders to join the currency circle. And it was not Bitcoin, but ICO (also known as Aixiou) that detonated the last currency bull market.

However, the story of Aixiou is very tortuous, and then the familiar 9.4 storm happened. On the grounds of protecting retail investors, the Chinese government tried to push Eciou out of the country, dispelling investors’ dreams of making a fortune… However, cryptocurrencies are not the same as previous changes. They can instantly cross borders silently and without interest. As a result, centralized exchanges such as Binance, Huobi, and OKex took advantage of the vacuum, and went against the wind, and finally took advantage of the general trend of the development of cryptocurrency to grow into a behemoth, which can make a noise in the currency circle. Earn a lot of money. And will Defi, or IDO, detonate this bull market in the currency circle?

Effective incentive mechanism and people-friendly infrastructure detonate DeFi

Satoshi Nakamoto founded Bitcoin in the hope that the decision to issue the currency will be controlled by the established procedures. If the world changes with time, Bitcoin must make changes, and it must be changed with the consent of the community. This is decentralization. Meaning. However, many decentralized cryptocurrencies are used by centralized systems as tools for making money. V God first proposed the concept of decentralized exchange in the article “Let’s run on-chain decentralized exchanges the way we run prediction markets” published on Reddit in October 2016. He pointed out that an ideal DEX does not require an order book (order book) system, and the price should be adjusted automatically based on people’s trading on this exchange. At the end of 2017, Hayden Adams developed the first DEX, Uniswap, based on the idea of ​​V God. After it went online on Ethereum in November 2018, the transaction volume has risen all the way and gained a good reputation.

With the decentralized exchange, DeFi lending also emerged. MakerDao is the first demonstration project of DeFi lending. Although the road to development is uneven, the results are still satisfactory. However, what broke the ceiling of DeFi and detonated IDO 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. who contribute to the lending transaction. When COMP was launched on Coinbase, it was exploded to an increase of 200 times, attracting countless “wool parties” with coins to repeatedly borrow money in order to earn more platform currency COMP.

The incentive mechanism based on Compound plays a key role in the development of the project. Another decentralized exchange, Balancer, is improved on the basis of Uniswap and added the bonus incentive mechanism of the platform currency BAL, also known as “liquid mining”. The BAL platform currency will be distributed according to the proportion of the liquidity contributed by each address to the total liquidity of the Balancer to encourage community members to actively contribute liquidity and participate in community governance. According to DeBank data, the total amount of Balancer lock-up has grown from 29 million US dollars on June 17 to approximately 190 million US dollars on July 17, an increase of nearly 7 times in one month.

Image source: realt.co

There are also projects in the DeFi market that aggregate, link, and reorganize different DeFi protocols. They are like DeFi Lego, in order to obtain the best benefits. Of course, once these Lego vulnerabilities are discovered by hackers, there will be a risk of being attacked. This has always been the biggest hidden worry of DeFi.

The popularity of DeFi is inseparable from the development of people-friendly infrastructure in the currency circle. For example, there is a decentralized smart wallet like MYKEY that uses traditional passwords to control accounts. In the case of loss of the private key, you can ask a preset trusted third party for help to restore the wallet (this function needs to be set before losing the password and mnemonic). This greatly reduces the threshold for the use of Xiaobai outside the circle. More importantly, MYKEY, etc., as a platform, aggregates many of the latest applications of CeFi and DeFi, such as the KEYID function deployed by MYKEY, so that the wool party no longer needs to spend time studying the registration and login methods of different DeFi platforms, just one click. Entering the latest DeFi applications, zero-based white users can also enjoy DeFi carnival parties. While many exchanges are still studying and demonstrating the feasibility of DeFi, institutions such as Coinbase, MYKEY, Matcha, and Tiger Symbol Exchange that have already deployed and deeply cultivated the DeFi field will rise in this round of DeFi frenzy.

Image source: MYKEY

So far, we can already see a complete industrial chain in the DeFi field, from project currency financing → providing transaction channels → mortgage lending, further financing and providing greater liquidity for the market.

Can DeFi help the long-term development of blockchain projects?

For a project party who wants to do something in the blockchain field, the most difficult thing is the cold start process of the project. The platform currency of the project shoulders the important task of inspiring 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 start the project by pulling heads like a fund tray, spending dozens of bitcoins to list on a centralized exchange with “very good” liquidity, accidentally causing disputes with the exchange, investors’ For rights protection, it is normal for currency prices to fall freely from a height. The decline in the currency price will in turn discourage the community and put project development in a state of stagnation. This is the most painful experience many blockchain projects experience in a bear market.

The emergence of Ethereum has made ICO fundraising possible. Now, the decentralized exchange allows the project party to build a trading pair fund pool for its platform currency (the most common is to provide the equivalent of Ether and project platform currency), and then complete the exchange on the wallet. In theory, as long as the capital pool is 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 amazing, which solves the problem of the liquidity of the platform currency in trading and its currency price may be controlled by some centralized exchanges. In addition, the incentive mechanism of Compound and Balancer also played an exemplary role in the cold start of the project.

Earlier, we saw that MakerDao combined with the lending platform Papechain to raise funds to advance the income from Spotify for musicians, which is a very good example of empowering entities. Recently, many platform coins with application value have joined the ranks of mortgage lending to promote financing. For example, Firstpool provides a 40% mortgage KEY borrowing USDT program for Bihu’s platform currency Key, and the loan interest rate is only 5%. In the future, I believe that more different types of lending activities can become a booster for the development of blockchain projects.

The possible negative effects of financial hype surrounding DeFi

From another perspective, it is undeniable that many new things must go through the barbaric growth stage of the wilderness, and both extremes of development may exist. Take Uniswap as an example, except that it can help the real project to establish tradable Outside the fund pool, there are also many dark sides that go against the original intention of kindness. Uniswap is also known as a big casino. The issuance of coins is crazier than ICO. The increase of the tokens in 6 days is 100,000 times. The one-hour run to zero has set a new record. These unscrupulous project parties and the wool party competitions who run more Fast, therefore, investors need to weigh between risk and return.

Image source: brave.com

Although the DeFi bubble can attract a lot of traffic to many projects and successfully cold start, many people doubt whether these wool parties can be transformed into long-term users. V God is one of them. Accepted “in early July than a push to” interview, he thinks high-yield liquidity mining model is not sustainable. Mining for the sake of mining, repeated pledge behavior is to obtain more valuable platform currency, so that the demand for platform currency increases sharply, and its price rises. When the platform currency of another platform has room for value-added, the transaction volume may be ruined by the loss of the wool party.

The sharp increase in currency prices will also attract wanton short selling by shorts. Recently, Chainlink was short-selled by a report from an organization, and used it to short-sell Link, which has risen astonishingly recently, and earn considerable profits. In the traditional financial market, there are many instances where institutions first sang short and then sold short, leading to the collapse of the “buildings” of physical businesses. Therefore, the development of more online and offline application scenarios is a top priority for blockchain projects. The project party must direct users’ attention to the development of the project’s business, and use it as a support for the currency price to form an anchor of value. A virtuous circle instead of irrational hype focusing on platform coins.

The biggest contribution that blockchain brings to us is to use code to replace the “trust” provided by man-made governance in the real world, improve efficiency, and reduce man-made evil costs. Bitcoin is the ancestor of decentralized finance. After 10 years of development, Bitcoin has gained the trust of more and more countries and people in the world. Many world-class financial institutions, such as JPMorgan Chase, Fidelity, Standard Chartered, etc. , Is or will provide different services to the encryption field. DeFi is the same as Bitcoin 10 years ago and Ethereum ICO 3 years ago. The idea is the same, and it will use code technology to jointly build a financial ecology in the decentralized encryption field. Costly centralized processing procedures will be replaced. Organizations that do not realize the changes brought about by this wave and participate in it will gradually be marginalized. Only those organizations that keep pace with the times can continue to be in the decentralization tide. Swimming.