Opinion: DeFi brings Ethereum to the bottom of the financial market, but as a service provider, it is going backwards.

I recently noticed that Ethereum updated the official website and changed it to a more modern style. The previous Ethereum official website had only one big logo and a lot of text introductions, just like an abandoned official website. Some may say that this is the proper performance of decentralization. You can also check out the Bitcoin website and you will have a feeling of deja vu.

"Blockchain APP Platform", a term used on the official website to describe Ethereum. After the website update, Ethereum official website began to pay more attention to openness, no longer emphasize some slogans such as world computer, blockchain application platform. It is now a more practical website. Anyone who visits this website can directly link to the introductory documentation, instructions on Ethereum development, or how to use Ethereum's tutorials.

It can be seen from the revision of the official website that this is an important ideological shift, and the concept of exaggerated voids has become concrete.

However, in recent years, the development of the ether has not been so smooth. PoS conversions are not yet possible, and early-developed dApps are becoming less and less active. Users focus their attention on where they can make more profit: new concepts, new platforms, or newly issued tokens. In the concept of these speculators/investors, the only two hard fork upgrades in Ethereum are just updates, and there are no bug fixes and optimization experiences. But as a practitioner of blockchain, Ethereum is more like a developer community.

Fortunately, due to this active developer community, Ethereum has finally created a usable application.

Performance is not satisfactory? Let's make an offline order match on a decentralized exchange, just write the results to the chain.

Is the market value not so impressive? MakerDao created a stable currency fixed on ETH.

ERC20 has not grown? Compound is based on its strong liquidity to carry out loan business.

In fact, these available applications have transformed Ethereum from the bottom of the world's computers to the bottom of finance. DeFi is a popular concept in 2019. Currently, more than 90% of DeFi projects are built on Ethereum. This is why many people refer to DeFi as one of the few new concepts in the etheric world.


Why choose Ethereum

Let me explain why more than 90% of DeFi projects are built on Ethereum. I think there are several objective and subjective factors.

The objective factor is that other ecological DeFi projects have just begun construction, such as the DeFi project Kava on Cosmos and the Akropolis project on Polkadot. These are just the names without specific applications.

For developers, there are three subjective factors .

A mature smart contract platform

Market-valued ETH assets (although ERC20 assets have flooded the market)

a large number of educated users

As the first intelligent contract platform, Ethereum has been running for about 5 years. It can be said to be a relatively stable project, and it can be said to be the longest running project. Some of the other projects have not yet launched their main network, and have even declared death. Developers like a stable platform with rich documentation, which saves them a lot of trouble in development. These are the advantages of ether.

At the same time, during the ICO boom, ETH users were widely educated. Many projects initiated crowdfunding by accepting ETH and BTC. Therefore, ETH and BTC are good value benchmarks for users. Most outsiders in the world know BTC first, then ETH. Therefore, the vast user community is also a fertile ground for the operation of the DeFi project.

Another crucial reason is that ETH has long been the symbol of the world's second largest market capitalization. Although it was overtaken by XRP in the bull market in 2017~2018, it turns out that the high-conformity tokens always outperform the highly manipulative tokens behind them.

The value of ETH has gained a high value recognition in many ups and downs. A large number of DeFi projects rely on ERC20 assets and use ETH as their financial value medium. The value fluctuation of ETH is not as dramatic as it was at the beginning of 2014, and it is quite stable now. As long as there is no “major earthquake”, it will rarely increase or decrease by 20% within one day. Stability is critical to the development of the DeFi project.

Because Bitcoin, the largest market capitalization entity, lacks a smart contract mechanism, Ethereum has become the biggest beneficiary of this emerging enthusiasm. Although BTC itself is one of the DeFi projects, it does not act as a financial medium in the DeFi project. So ETH has the opportunity to surpass the former.

Will DeFi become a killer app?

V God once said:

“Finance is the best foothold for the blockchain. You may rarely consider how difficult it is to transfer funds overseas in developed countries.”

Among the traditional financial services recognized by the public, banks are the most direct central system. They make a profit by providing guarantees, absorbing deposits and using deposits for lending. The once prosperous P2P lending system is to provide lending matching services to make a profit. The New York Stock Exchange and the Shanghai Stock Exchange offer investors the opportunity to participate in stock trading, and they can get transaction fees. Of course, there are many other financial services, such as security, convenience, and information, which are inherently profitable.

The biggest difference between decentralized finance and DeFi is that the latter directly converts these "services" into "self", which greatly reduces friction and improves transaction efficiency.

BTC demonstrated the possibility of cross-border transfers. When you want to send money to relatives in the United States, you no longer need to go to the bank, comply with foreign exchange controls, fill out the remittance slip, and wait for up to two weeks of remittances to arrive. Value transfer represented by BTC can replace banks. You can use a crypto currency wallet and you can transfer money in 10 minutes with just a few taps at your fingertips, while saving a lot of money.

The MakerDAO project issued a stable currency DAI with ETH as a collateral asset. DAI fixes the dollar in a 1:1 ratio. Behind it is the recognition of the value of ETH, not a simple credit endorsement. Through smart contracts, people can clearly see the DAI anchorage through ETH and interactive tools. The use of DAI is very transparent and simple, and it also saves a lot of cumbersome procedures.

Compound provides a variety of ERC20 token lending services through the liquidity pool created by smart contracts, which effectively improves the liquidity of cryptocurrency. People can simply mortgage their assets and lend them out to make a profit. Of course, you can also borrow a certain amount of deposit directly from the liquidity pool for other purposes. The liquidity pool and exchange rate are controlled by open source, and the whole process is transparent and simple.

Dharma demonstrates the possibility of P2P lending, maximizing the flow of transparent assets through point-to-point matching of smart contracts. Compared with the actual situation of P2P, its biggest advantage is openness and transparency, and there is no high intermediate matching fee.

In summary, BTC changed the cross-border remittance mechanism to system code. MakerDao integrates the token distribution code into its own protocol. Compound creates contracts and provides loan services on MakerDao. There are many other DeFi projects in progress that slowly transform the "services" provided into integrated "services" . This is also one of the main reasons for the decentralization of financial services to the public.

But DeFi is not omnipotent. While the DeFi project brings convenience, it also introduces a lot of hidden costs, including cognitive costs, risks, and system errors.

Can DeFi without tokens become another financial technology?

Currently, many DeFi projects have not yet released their own tokens. Most of these projects are based on Ethereum's own symbolic economic model. In fact, this is a potential problem. Check out any token model that is not a DeFi project on Ethereum and you will find it very embarrassing.

Chainlink's oracle caller consumes ETH, the contract compensates the data provider through Chainlink; Loom's staking needs to enter the Plasmachain from ERC20, and then the token is locked on the Plasmachain contract; IoTeX's Staking supports mutual conversion between the main network and ERC20, and also supports With the two tokens Staking, this mixed experience is not easy for any user to understand.

After 2018, almost all DeFi projects were designed as non-token models (except Maker). I think a trend is that the DeFi project is going backwards as a service provider. The "service" provided by DeFi may be behaviors generated by integration contracts , such as DAI generation, Dharma matching, transactions in Dydx, etc., which are not significantly different from centralized methods. The only advantage may be absolute transparency and the increased fee service that will increase in the next few days. Of course, it cannot be ruled out that the project uses a blockchain to create semi-centralized or centralized projects to solve the key issues of centralized financing, rather than all issues, such as asset ownership.

For the time being, it is difficult to judge the vitality of adopting the method of “no tokens”. In a huge context, designing a perfect economic model is difficult. Although there are many practitioners, there is still a lack of good ideas in the market. Looking back at some projects that have already issued tokens, such as ox's ZRX, MakerDAO's MKR, I want to use a Chinese expression to describe them: "chicken ribs" – tasteless, a pity.

In addition, we should pay special attention to infrastructure providers like Cosmos and Polkadot. The cosmosSDK-based project has a complete design model and an economic model is essential. But for underlying projects, if you want to use Polkadot's consensus, you might face the same situation as the DeFi project on Ethereum. Of course, you can design a consensus that is independent of Polkadot, which is very similar to CosmosSDK.

When the above project is completed, I believe that DeFi will enter a new phase.

Ethereum 1.0 and 2.0

From the recent situation, we may never see Ethereum 2.0 launched in 2019. According to the current roadmap, Ethereum 2.0 has three main tasks:

PoS (CasperFFG)



The transition to PoS is an ambition at the time of the release of White Paper 2.0. In the 2.0 phase, Ethereum will implement a temporary PoS consensus (PoW+PoS), which will bring about the certainty of the transaction and improved security. Fragmentation is a study that only performs transactions on the extended chain, but it is difficult to implement. eWASM is a virtual machine that was developed with a new vision to improve smart contract performance. Overall, the major new features of 2.0 will bring significant performance improvements to Ethereum.

In this case, the DeFi project will face many changes, especially if the smart contract layer is completely rewritten, and the DeFi project must also accept changes. Another real question is whether it takes no high frequency for the DeFi project to require a high TPS ? Symbolic loan or a stable loan. One might say that decentralized exchanges do this, but many decentralized exchanges now use cross-chain matching. If the match is moved to the chain, the original code may not be fully compatible. Therefore, it is very likely that once 2.0 appears and the existing project does not keep up, then someone must speed up the development of the corresponding 2.0 project, and require higher security and faster update speed.

Therefore, it is foreseeable that Ethereum 2.0, CosmosSDK, and Substrate will compete on the same stage. The last two development kits have been updated several times. The Ethereum 2.0 test network is also already running. I believe that the Ethereum project has already begun to try.

Author: Stafi_Protocol

Compile: Sharing Finance Neo

Source: Sharing Finance