Author: Caikai Long, from October 31 summit on the global financial technology DEFI keynote speech text version.
I have been doing academic research on digital currency for most of the year and have been particularly interested in DeFi recently. I think its future prospects are immeasurable, although DeFi is now very small. I will spend some time explaining to you what DeFi (Decentralized Finance) is, a decentralized financial application. Since it is related to finance, let's first understand what finance is, and then talk about the nature of finance, to discuss why DeFi is very promising.
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The essence of finance
I used to teach financial undergraduates at American universities. After many years of teaching, I summed up a sentence from finance. People who are not familiar with finance should understand the essence of finance as long as they remember this sentence. The essence of finance can be condensed into: the exchange of utility and risk in space and time. Let me explain. We all say that finance has two important things, one is the return and the risk, and the greater the risk, the greater the return. The return is not the same for everyone, such as investing in stocks, the return may be higher, and the investment may be higher in the currency. Everyone has different requirements for returns. It may be quite high for you 10%, but it may be very low for me 10%. So I changed the relationship between risk and return to risk and utility. What economics is studying is the utility of these things to you. Therefore, when we are doing finance, we are actually doing an exchange between risk and utility. At two latitudes, one is in space and one is in space.
The essence of finance is concentrated in abstraction, giving you some examples. For example, we say that the money is in the bank. What kind of utility and risk exchange? What do you get when you put the renminbi in the bank? Get a fixed return, that is, deposits, interest 2%, 3%, and then pass the risk on to others (note, this risk is negative), the central bank took the money away, invest, and give you the return. It is a simple risk and utility in the exchange of time and space.
Another example is insurance, what is insurance? Insurance is to pass the risk on to the insurance institution. You pay some insurance premiums, and the utility is the guarantee brought by the insurance. This is also an exchange of utility and risk in time and space. This is true in any financial scenario, whether you are centralizing decentralization or not, it revolves around this essence.
Financial system: centralization vs decentralization
How can we achieve these essences of finance? We need to have a financial system, a financial system that guarantees the stability of financial operations. What must be done to ensure a stable operation of the financial system? This exchange is real and this exchange is fair and effective. Without a financial system that guarantees a true, fair, and effective financial system, this financial essence cannot be achieved, whether centralized or decentralized. So let's take a look at what kind of institutions are needed in the centralized financial system, what kind of measures or what kind of ways to ensure that our utility and risk are exchanged in time and space, true and effective.
For example, we have KYC, such as a bank to ensure that money will not be lost. For example, we have a contract. When we make a contract, we must sign a contract. We must have a lawyer. We must have a court. If you have a dispute over the contract, you can find the court. If the public security police is not implemented, this is to ensure that the transaction is fair and true, which is the traditional financial system.
Another example is that there are many assets and stocks. Where do you put them? It is impossible to put it at home, and the family has been stolen. If someone else does not recognize these stocks, you will put the stock in the custody center, which is the stock exchange trust center of the Shenzhen Stock Exchange. It is to ensure that the equity transaction is true and fair, and this is also the traditional centralized financial system.
For example, brokers, investment banks, and even the central bank, this is the central financial system must be available for us to exchange utility and risk. This is centralization. But we have to look at another way. I just said that a financial system has a variety of roads and roads that lead to Rome as long as it achieves its goals. So there is such a traditional centralized financial system in the real world. Let’s take a look at us. One system is called DeFi decentralized financial system.
In our decentralized financial system, the code we pursue is the law. There is no police without a court. The code smart contract auto-execute sets all the relationships and exchange rules. This is the core point of DeFi, Code is the law, At the same time, it is open and transparent, creating a kind of trust, without supervision or government endorsement, naturally becoming a trading mechanism that everyone believes. At the same time, cryptocurrency is used as the medium for value transmission. Although the decentralization system is different from the centralized system, the effect is the same, that is, it can be fair and true when the risk and utility exchange are guaranteed.
What do you think about what objects can be guaranteed to be fair and true? Not all objects can be guaranteed. For example, a few days and a few days, next month or next year's transaction, such as arranging which coffee shop to make delivery this afternoon, these objective objects can be guaranteed because of objective criteria. However, there is no way to guarantee the truth, fairness and effectiveness of subjective risks and effects. Why? Because everyone has different feelings about this risk and utility. Everyone has different experiences with this risk and the standard of utility, and there will be transactions. For example, I am selling you more than $9,000 in bitcoin. I sold you Bitcoin. You bought Bitcoin. What is the reason? Because I think Bitcoin I already feel that it is very high, and you think it will rise if you buy it, right. Therefore, there will be transactions. If we all think that Bitcoin will definitely rise, it must be kept, and it must be bought in the market. Therefore, market participants must have subjective interpretations of different effects and risks on objective objects, and transactions will occur in the market.
Just told our teacher Li, he said that SB's consensus is also a consensus. There is a joke that when the market fluctuates greatly, a group of people enter the scene, and a group of people appear, and each other thinks that the other party is SB. This is because everyone has different understandings of utility and risk, so there is a financial transaction.
Therefore, under the conclusion, we have no way to use the financial system to ensure that this utility and risk are true and fair, because this is very subjective, but we can use the financial system to guarantee the assets of the underlying transaction. The time and space of the transaction is fair and effective. of. The entire financial center, whether it is centralized and decentralized, does this to ensure that the transaction is true, fair and effective.
DeFi and Pratt & Whitney Finance
Understand the purpose of the financial system, let us look down: Where is the meaning of the decentralized financial system? What is the use? Decentralized finance is very suitable for inclusive finance. Everyone is familiar with inclusive finance. Every country in the world is pushing Huihui Finance. The inclusive financial requirements are very simple. The meaning of Pu is that there are many users, and the meaning of Hui is cheap. Being able to do inclusive finance is to be able to make users more and cheaper, and to be able to exchange real and fair risks and utilities with multiple and cheaper.
Can DeFi do it? It's okay, because the entry barrier is very low, you don't need to be a big customer or you can use DeFi. Just go online, just buy a bit of bitcoin, digital currency, Ethereum, you can use DeFi. The whole system is reliable, transparent and open, and this does not require me to explain more, because the actual application of the blockchain is very transparent and open. No risk of opponents, this is not difficult to understand, our contract is a smart contract, the code is the law, the assets are in the chain, so the counterparty has no way not to execute it, when the smart contract is automatically executed, the assets on the chain are automatically Conversion. So DeFi is a financial technology that I think is most likely to achieve inclusive finance. Although it is still very small, although it is still in its infancy, if it is developed, it is the most likely way to achieve inclusive finance.
Everyone has heard about P2P, some chaos in financial technology, and the country is rectifying. what is the reason? Because they want to do inclusive finance but do it, such as running the road, the pool of funds. These things are completely solveable in DeFi. It is impossible to have a pool of funds, because each transaction is transparent, and the contract code and transaction method are all on the chain, and all the smart contracts are solidified. So DeFi is probably the most effective way to inclusive finance. Of course, these are what we expect to happen in the future.
DeFi market prospects
Expectations come to expectations, we are still back to reality. Let's take a look at how big the DeFi market is now. This is what I found four days ago three days ago. At present, the amount of DeFi locked by the entire Ethereum system is 540 million US dollars, which is probably the current market size. We may be adding EOS to a total of no more than one billion US dollars, which is about the size of the market. In the research report released by the world for a while, the market is almost the same in the market, about one billion US dollars.
How big do you think the theoretical DeFi market is? Think about it, how big can DeFi do in theory? In fact, I have figured it out for you. It is calculated to be 1.8 trillion US dollars. In theory, the market can reach a market of 1.8 trillion US dollars, instead of the current 1 billion dollar market. How did you figure it out? Because we just mentioned that the financial system can be centralized and can be decentralized. In theory, the market size of the existing centralized financial system is the theoretical upper limit of the decentralized system. How much GDP has been generated by the centralized financial system? We can simply make an arithmetic. China's GDP is about 10 trillion US dollars, the US is about 20 trillion US dollars, and the other 40 trillion in Europe. An average of 4.5% is generated by the financial industry. Why do these financial industries pay banks, lawyers, accountants and investment banks because they provide centralized financial services. In theory, the GDP generated by these people is likely to be replaced by DeFi. So doing a conversion is about 1.8 trillion. That is, the current DeFi market is still very early, and there is still a long way to go.
Why is DeFi still so small now? We can take a look at DeFi's current ecology, because everyone will have a detailed discussion of the entire ecology in the morning and afternoon, so I won't go into details. Payment, asset management, forecasting market, KYC, derivatives, insurance, and lending are all segments of the entire ecology. The lending branch is currently the hottest, and the hottest exchange market, I mean the decentralized exchange. If you are involved in DeFi, you should be familiar with this. If you are new to digital currency, you will not know much about it. There are also many uses that have never been used.
The following is the DeFi ecology of Ethereum, because in the entire ecosystem of DeFi, Ethereum dominates, followed by EOS. More than 80% are still in Ethereum, because smart contracts are doing better.
Problems in the development of DeFi
The DeFi ecosystem looks so complete, but the volume is so small, why? Because of several main reasons, that is, I have to say some development problems of DeFi. If DeFi can overcome these development problems, the future prospects are very good, but at present these objective obstacles still exist.
The first is that the number of users, activity, liquidity, and transaction depth are far from enough. Don't say that compared with traditional finance, it is much worse than the corresponding centralized mode in digital currency. For example, in the decentralized exchange DEX field, such as the fire currency, the currency security are centralized exchanges, the depth of the transaction, the breadth of activity is several orders of magnitude beyond DEFi's DEX.
As an example, MakerDAO is currently the largest DeFi loan project, with only 2,000 people living on the day, and very few. It is a digital currency exchange that may live 20,000 a day, usually 35,000 yuan, or 100,000 yuan. In the past few days, when the market was hot, it was hundreds of thousands. At present, there is no objective evaluation of DeFi user data on the market. The previous MakerDao introduced almost 20,000 users when doing coinbase marketing, so we estimate that the total user of MakerDao should be around 50,000 to 80,000. Then the research report to be released in the currency world said that the entire DeFi user estimated 130,000. I think this figure is quite reasonable. According to this figure, the total number of DeFi users is currently only 130,000. This market is still very small.
Then another example, there is a number of color map ecology just put in the forecast market Dapp called Veil, survived for six months, just stopped operating, operating only six months for only 310 users, you can imagine that this market is more small. I believe that no one has used this app except me, because the number of 310 users is too small.
There are many reasons why the market is not big enough. One of them is more than relying on Ethereum, because Ethereum's smart contracts are very easy to use. So at the beginning, everyone used Detai when they developed DeFi, and slowly EOS started to use EOS. But not enough, because Ethereum itself has a much smaller number of users than Bitcoin, and EOS is even less. In the morning, I talked with Uncle in the roundtable forum that DeFi needs to be cross-chained. I need to cross-chain DeFi assets, not only cross-chain, but also cross-bitcoin, cross-country other currencies, and also touch real-life assets. It is possible to solve the biggest problem by being able to go on the chain, that is, the problem of insufficient users and low activity.
Too much reliance on Ethereum will cause the throughput to be limited by Ethereum. Ethereum is now 1.0, and at the stage of development, V God has given up, to launch 2.0, feel that 1.0 can no longer expand, can not provide more throughput. So V God wants to push 2.0. But 2.0 has a lot of synchronization issues, fragmentation issues. The current work is difficult to transplant to 2.0, 2.0 design system is completely different, so DeFi will inevitably have the impact of the underlying technology upgrade. It is estimated that many entrepreneurs now do DeFi, which should be affected by the upgrade of Ethereum.
The third issue is that the product user experience needs to be improved. We are also discussing this issue in the morning round table. I believe that everyone who has used DeFi in the room will definitely feel that it is too much trouble to use DeFi. You must register first, register the wallet, and install a few apps to move the coin. This user experience It’s not like the Internet people do. Internet people want to be the ultimate in user experience. This user experience is far from being the ultimate, and it is really cumbersome. The user experience of DeFi needs to be improved.
There are not enough cross-chain agreements, just the asset cross-chain that I just said. The advantage is that many people realize that cross-chain assets are not enough, so there are several cross-chains in the DeFi project. The stable currency Dai is based on Ethereum, and MakerDAO can be chained for more assets. In November, it will launch a multi-asset mortgage.
In addition, the asset utilization rate is low, and the main assets are mainly mortgages. In the ecology that we have just seen, derivatives, payments, stable currencies, loans, and insurance are mainly borrowed, and borrowing is the main resource utilization rate. , like MakerDAO is 150%. It is to put 150 Ethereum to mortgage a hundred Dai, which is relatively low mortgage rate. The utilization of funds is still not enough. The traditional financial system can just be put high, because it can be loaned and leveraged after KYC verification, but it is not easy to decentralize the system now. DeFi can be done by everyone, so the credit and strength of the counterparty are completely unknown, so there is no way to put a lot of leverage, otherwise you will not be able to catch up with you. It is not easy to put leverage, which is a problem that the decentralized financial system has to face.
Too few assets on the chain are also problems that DeFi encounters. We are currently only able to do some DeFi financial products on Ethereum, EOS and even some bitcoins, which is not enough. UMA is an agreement that wants to connect any asset of traditional finance to the chain, such as stocks, such as the Shanghai and Shenzhen index, UMA provides predictive machine Oracle, how many points of stocks will be available next month and products on DeFi Docked up, become the basis of the transaction, and then you can implement the asset chaining method in the UMA protocol. I think UMA is still very rare. UMA has just been released soon, and the effect remains to be seen.
The last issue that everyone is very concerned about, many media reporters ask, is DeFi supervision a problem? Many people think that regulation is a big problem, because regulation is very important for finance, but I personally think that it is not a problem for DeFi. For DeFi, supervision is not a big problem. What is the reason? An example can be given. Some girls can't say when they go running and play, saying that after running, the legs will become thicker and the playing arm will become thicker. I said that you are so thin that you have not started to exercise and you are worried that your hands will become thicker. This worry is too early. This is to say that this DeFi is worried about the issue of supervision, worry too much too early, consider too far.
why? Because DeFi is too small, the entire market capacity is less than 500 million US dollars. What do you think so far? Supervising so many things is busy, no attention to this new and small DeFi field. The second DeFi has not yet accessed the legal currency or offline assets. The traditional assets are not connected. Is it not a currency transaction for supervision? It is not a change in exchange, the profit between different currencies, the conversion of risk and utility, for the supervision, it is the thing that the currency circle plays by itself, and will not affect the traditional economy. So if DeFi hasn't touched the traditional financial world, it doesn't matter if it's not connected to the French currency.
There is another reason why DeFi doesn't need to worry too much about regulation. The fourth one is ""The sky is falling and there is a tall man." Who is tall, is a centralized digital currency exchange, and the regulation has not yet introduced how to manage the center. How to standardize the decentralization of digital currency. The advantages of decentralization and centralization are obvious and open and transparent. All contracts are in code and are a transparent mechanism. This is easier for regulators. So I think that at this stage, I am worried that the DeFi industry supervision is too early and too early. I don't need to worry about these problems. I also need to wait until the user scale, traditional asset access, and centralized digital currency supervision have become a problem. This is a good thing. Entrepreneurs don't have to worry about the limitations of this and that, let go of their imagination and try.
This is what I share with you. Why are DeFi advantages and disadvantages? I think DeFi is a very good hot spot for the future of financial technology. Although it is still early, many VCs are also very concerned about this. These are shared with you, thank you all.