In August 2018, DharmaLabs co-founder and COO Brendan Forster put forward the concept of “DeFi” for the first time with the belief that decentralized finance will become the mainstream of the future. DeFi has proposed a new solution to traditional finance based on the characteristics of the blockchain. In the current environment, the two can form a useful supplement.
Traditional financial model is moving towards dusk
In our daily social life, finance realizes the value circulation across time and space, is the core of the modern economy, and brings countless conveniences to people. The financial institutions we usually come into contact with can be roughly classified into banks, funds, brokerages, insurance, trusts and so on. The operational nature of these institutions is often to adopt a centralized approach, using their authority as a credit intermediary to connect the fund supply party with the capital demand side, and then charge a certain interest or return.
It is understood that these centralization institutions absorb deposits from ordinary people and invest in certain institutions or entities. Because of the regulatory requirements and the types of institutions, different business names and investment targets have the power to become "debt and income rights." , equity, stocks, currencies, ETFs, REITS, etc., business names are also different, the purpose is to achieve the expected return on investment, or to prevent certain risks through hedging.
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With the advent of the Internet era, the various P2P companies and wealth management companies in the market, and the mutual gold companies under Tencent Ali can be counted as the 2.0 version of the financial industry, called Fintech Financial Technology, but its essence is not much different from traditional finance.
The data shows that by the end of 2018, the global asset management industry has reached more than 80 trillion US dollars. After the financial crisis in 2008, the compound growth rate of the market has reached 12%. In recent years, the overall asset management market in China has remained at 124 trillion yuan. In 2020, it will reach a level of 200 trillion, mainly led by bank wealth management, trust planning, insurance asset management, brokerage management, and public/private funds.
But in the system of traditional financial models, there is a huge unfairness. Unless there is a financial crisis or a large-scale stock market crash, ordinary financial people share high profits when they invest successfully, and when the investment fails, the risk is paid by investors.
Take the 2008 US subprime mortgage crisis as a model for the Hollywood film “Big Short”. For example, third-party intermediaries cannot guarantee independence. The credit rating of middle and low-level assets of mortgage asset securitization is very different from the actual situation, which ultimately leads to information gap and disaster. The greed and ugliness of human nature are even more vivid.
It is understood that the black box of the investment process, the failure of the risk control link, the petization of the third-party evaluation agency, the centralization of the asset management enterprise structure, the short-term vision of the project interests, the lack of liquidity of assets, and the hollowing out of the underlying assets are the “seven of the traditional asset management institutions”. crime". This also indicates that the traditional financial model is moving towards dusk.
DeFi brings reform and revolution in the financial industry
In August 2018, DharmaLabs co-founder and COO Brendan Forster put forward the concept of “DeFi” for the first time with the belief that decentralized finance will become the mainstream of the future. In his article "Announcing De.Fi, A Community for Decentralized Finance Platforms", he believes that the "DeFi" project needs to meet the following four characteristics: building on the decentralized public chain, financial applications, open source code, and a complete developer platform.
DeFi was originally a concept of a currency circle. It can be seen that the founding members of DeFi are all currency projects, and the financial facilities in the Ethereum ecology are concerned. More directly, DeFi's original mission was to build financial infrastructure for the various tokens within the Ethereum ecosystem. In the eyes of practitioners, DeFi is expected to realize the automation, intelligence and decentralization of the financial industry, and will also enable the blockchain to once again empower the physical industry. From stable currencies, digital currency lending, decentralized exchanges, to larger, broader securities, futures, and derivatives markets, DeFi's reach is constantly expanding.
At present, the decentralized ecosystem formed by the DeFi system includes: wallets, exchanges, stable currencies, loans, derivatives, and asset issuance, which initially cover the major functions of the traditional financial system. In 2019, the concept of DeFi became the focus of the blockchain industry and the financial industry. Benefiting from the continuous improvement of the blockchain industry ecosystem, the industry has expanded the connotation and extension of DeFi: the use of open source software and distributed networks to transform traditional financial products into a non-trusted and transparent protocol. Accordingly, DeFi includes not only open source blockchain projects that serve the financial industry (or provide financial services) based on the ETH network, but also Bitcoin, Stellar, etc. that issue certificates and pay for settlement.
DeFi project on the Ethereum network
In this year's Ethereum's four-year birthday commemoration, some people compared IC0 with DeFi: Last year, IC0 (projector) held about 4.6 million ETHs in Ethereum, now 2.3 million ETH. It is said that this amount of decline is called the "death spiral" of IC0. Similarly, from last year to now, the number of Ethereum held by DeFi is about 390,000, and now it is 2.3 million, which means that the ETH locked in DeFi has made up for the death spiral. According to its forecast, the amount of ETH locks will return to 4.6 million a year later.
From Bitcoin to Libra, blockchain technology has one of the most basic and universal goals – building new financial facilities that are shared by the global financial system that are different from traditional financial systems. Unlike Bitcoin, DeFi poses a greater threat to the traditional financial industry, and the creation and development of DeFi is beyond the reach of the traditional financial industry. With the maturity of DeFi and the iteration of blockchain technology, DeFi will play a more and more important role, and even the financial system that dominates the future "code world" is unknown.
For a big step in finance, how to take a small step in DeFi?
Although DeFi's innovative concept has impacted the existing financial model, for the traditional financial industry, these projects in the DeFi field seem to be very weak, and there is no possibility of competing with the traditional financial industry. Judging from the actual conditions, DeFi has more advantages than traditional finance, and can complement each other to achieve a "win-win" situation.
On the one hand, DeFi advocates non-discriminatory but conditional (with conditions for asset requirements) , the adoption of blockchain technology guarantees high transparency of transaction data, irreversible transaction and a certain degree of resistance to censorship. Traditional finance has a long history, a deep social foundation and a broad coverage population (based on credit and risk control), and there may be a high overlap between DeFi users and credit-based financial users based on Certified Assets.
On the other hand, DeFi uses blockchain technology to improve the transparency of transaction data, ensure the irreversibility of transactions and a certain degree of review resistance. DeFi has certain advantages in preventing malicious inflation of the regime. The blockchain technology has the characteristics of open source code, irreversible transaction behavior, transaction information that cannot be falsified, publicly queried, and traceable (transfer) traceability. Compared with the traditional financial industry, DeFi information transparency is significantly improved, and the open source and decentralized mechanisms of source code have certain advantages in preventing malicious inflation of political entities.
There are currently thousands of qualified blockchain projects. According to the financial industry's division criteria, DeFi can be divided into: currency banking services (such as issuing stable certificates), non-monetary banking services (such as loan agreements), securities financial services (such as classification exchange agreements, derivative agreements / forecasting markets, Bundling agreements, fund agreements), other financial services not included (eg tokenization protocols, KYC/AML/identity, applications/tools, analysis, others).
Obviously, at this stage, DeFi is mostly concentrated in the fields of issuing certificates, financing, transactions and related financial instruments. With the help of blockchain technology, it is traceable, non-tamperable and highly transparent, which is a useful supplement to the current financial industry. At this stage, DeFi needs to play a complementary role in financial content and form rather than a substitute. However, existing financial institutions also need to use DeFi to expand their service content and coverage without the need for access. The low cost of trust makes the service object diversified, which in turn leads to the relative security, trust, efficiency and a certain degree of business model reconstruction.
Author: Dipperin Pan Pengfei