Source: Blue Fox Notes
If counting from Bitcoin, the development of blockchain has been more than ten years. In addition to bitcoin's earth-shattering shock, the latest real turning point in blockchain is the birth of smart contract platforms. Smart contract platforms have brought new species, and currently the most important are financial and gaming. The game is mainly based on non-homogeneous tokens. In this regard, Blue Fox Note has also been discussed a lot. In the future, it will form a larger value area around the generation and trading of non-homogeneous tokens. It is still in the initial stage, but trading The market has stabilized. The financial aspect is mainly DeFi. Recently, many readers of "Blue Fox Notes" have reported that DeFi is a bit complicated, but I really want to know what DeFi is. Today, Blue Fox Notes briefly explained DeFi.
What is DeFi?
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Before understanding the importance of DeFi, let's understand what DeFi is. It comes from decentralized finance in English. DeFi is the abbreviation of this phrase, if the literal translation is "decentralized finance". But in fact, it is more appropriate to call it “distributed finance” or “open finance” because, in essence, there is no complete “decentralized” finance, and most of them are different degrees of centralization and decentralization. Combination. However, DeFi has been agreed upon and is more suitable for dissemination.
So what exactly is DeFi? It generally refers to crypto assets, financial smart contracts and protocols based on smart contract platforms (such as Ethereum). These assets, smart contracts, and protocols can be combined like Lego, so they are also called "currency Lego".
DeFi is the second breakthrough in crypto history
The first breakthrough in the history of cryptography is Bitcoin, which through the appropriate use of cryptography, consensus mechanisms, peer-to-peer networks, incentive mechanisms, etc., has completed the value transfer without the participation of third parties. From the current point of view, the primary stage of value storage and transfer has basically been achieved, and it is the most dazzling and successful first breakthrough in the history of encryption.
DeFi can be regarded as the second breakthrough. Although it has not reached the height of Bitcoin, it has already begun to take shape and has potential for growth.
Why DeFi is the second breakthrough in crypto history
To understand DeFi, you must first understand why it exists. It exists because it can meet the financial needs of some people, and these financial needs cannot be met by traditional finance.
- Opaque financial and economic crisis
The core object of finance is money. Currency is spontaneously generated by human society in the development process, and is not inherent. The first human exchange was barter, but the biggest problem with barter was inefficiency, because it was difficult to find two people who happened to have items to match their needs, a fisherman who needed shoes and a shoemaker who needed grain It is difficult to reach a deal between them.
How many catfish can a pair of shoes change even if the demand matches? How to calculate the price is another problem. Therefore, the need for money has arisen. People need a currency to exchange between different items. This currency becomes a medium of exchange and can also store value. A currency that cannot buy 10 fish today can only buy 1 fish tomorrow. Already.
In human history, there have been shells, precious metals, gold and silver and other currencies. To this day, they are fiat currencies. Through the integration and operation of intermediary institutions, traditional finance has improved market efficiency and achieved better resource allocation. But at the same time, due to the existence of intermediaries, many problems have arisen in the traditional financial system, such as opacity and spam. This leads to excessive debt and excessive inflation. Once economic development stagnates or there is excessive inequality in the economic distribution, and the debt structure is not digested in a timely manner, an economic crisis will easily break out.
In the current intermediary-dominated financial structure, the economic crisis seems to be difficult to avoid. The core of the blockchain is transparency and distribution, which leads to the opportunity to change the current status of the current financial structure. This is the key to why DeFi can work in the future.
- DeFi is different
So far, DeFi is far from being successful, even compared to the breakthroughs made by Bitcoin. Compared with traditional finance, its magnitude is not even a small amount. But why is it important?
DeFi's goal is to build a transparent financial system that is open to everyone, without permission, and without relying on third-party institutions to complete financial needs. Examples include lending, trading, payments, and derivatives.
It is open finance, which is also brought by the infrastructure of the blockchain, and is also inspired by Bitcoin. Its most important feature is verifiability and transparency. With the blockchain, one can verify every transaction that takes place on it, which also brings transparency.
- DeFi is the currency of Lego
With the basic Lego module, everyone can assemble different things according to their needs. The same is true of smart contracts in DeFi. Through various assets, contracts and agreements, new projects can be assembled to provide users with new products and services.
For example, Compound is an Ethereum-based lending market. In this market, you can borrow ETH, you can also borrow the stable currency Dai generated by MakerDAO, and you can also borrow the stable currency USDC generated by the USD mortgage. When users provide Dai to Compound, users can receive cDai tokens. cDai represents the user's Dai and the interest generated from it.
cDai itself is a token, which means two things. One is that cDai can be circulated in the market, and the holder can get a profit. For example, if you trade cDai with ETH through Dex such as Uniswap and hold cDai, then you can get cDai gains. The second is that it can be used by other smart contracts, for example cDai can be used by Uniswap. MakerDAO mortgages ETH or BAT to generate Dai tokens, and putting Dai into Compound can generate cDai, and cDai can be exchanged with other tokens on uniswap. This is a simple example of Lego Currency.
- DeFi is a parallel world of traditional finance
Traditional finance has the advantage of intermediary and has gained the trust of many people through services. This can meet the needs of a large number of people in the real world. And in this world, there are still some people who want to take control of financial services themselves. This is also the key to the existence of DeFi. To serve these people, DeFi is building a world parallel to traditional finance.
For example, Compound, Dharma, Maker, etc. are providing lending services for crypto assets, which is similar to the encrypted version of traditional banks, which is DeFi Bank. Items like Uniswap, Kyber, Bancor and other projects provide asset exchange services, similar to the Nasdaq, NYSE and other exchanges in the traditional financial world. They are DeFi versions of exchanges, as long as they have crypto assets and wallets, they can be exchanged.
- DeFi is not just a parallel world of traditional finance
DeFi is not only a mapping of traditional finance in the crypto world, it also presents new features. For example, it realizes fast exchange through the fund pool; its borrowing interest rate can be adjusted instantly, it can join or withdraw at any time, and there is no borrowing period for traditional borrowing. As another example, its borrowing income is reflected by its tokens, and if users purchase the tokens, they can essentially enjoy the borrowing income of the tokens, which is equivalent to tokenizing the creditor's rights and achieving circulation. Greatly accelerated the liquidity of assets. DeFi does not require permission and transparency, which is also beyond the reach of traditional finance.
Because DeFi is a user interacting with a series of smart contracts on the blockchain, people can take advantage of its transparent and license-free features, such as the best price transaction through the aggregation of DEX; the best is achieved through the aggregation of loan agreements Interest income.
Looking at the lending business, DeFi's current borrowing needs to be over-collateralized to achieve lending. Because all lending and settlement processes are enforced by agreement, there is no need to worry about defaults and no third party involvement. At the same time, because the intermediate link is omitted, the lender can obtain higher income and the borrower can obtain better interest rates.
Of course, DeFi is not without risks, which is also its deficiency compared to traditional finance. Although traditional banks also have bankruptcy risks, they are relatively stable and predictable. The DeFi project may face Black Swan events, such as the rapid decline of crypto assets in a short period of time, resulting in the risk of collapse due to liquidation; in addition, if the code is vulnerable, it may lead to the risk of hacking.
- Convergence of DeFi and traditional finance
At present, DeFi is a part of people's needs, not everyone's needs. Not everyone has the ability and willingness to manage crypto assets. A more likely scenario is the integration of DeFi and traditional finance, each with a user group. Traditional finance can use the characteristics of DeFi to achieve liquidity, and DeFi can use the assets and compliance of traditional finance to achieve scale expansion.
USDC is an example of the combination of DeFi and traditional finance. Currently, USDC's lending business volume in DeFi is second only to ETH, and even exceeds Dai. USDC inputs the currency of the traditional world into DeFi to form a stable currency, and then uses DeFi's features such as no license, fast circulation, and transparency to play its role.
Traditional financial demand has its historical inertia. From today's perspective, DeFi is difficult to expand without the participation of traditional finance. Although this is not what many idealists and geeks would like to see, DeFi can be used in the real world. The biggest role is to help traditional finance to achieve faster flow of assets through the blockchain's license-free and fast circulation, so that many originally solidified assets can be reborn.
Even Dai cannot be 100% pure decentralized, because its security requires the governance of MKR token holders, the need to prevent attacks on its oracles, etc., all of which require a certain degree of centralization to maintain Safety.
DeFi itself is open finance and is a new form. It can make full use of the characteristics of blockchain transparency, openness, non-tampering and no intermediary, without having to exclude the traditional financial world. If the two can find a way to merge, a new species will be created.
This will become increasingly apparent as real-world assets circulate on DeFi. For example, if you buy 100% of the tokens of a house, but the house involves many legal rights and obligations in reality, you cannot automatically obtain all the rights and interests only through the token transfer, which requires the implementation of traditional law To resolve disputes.
- DeFi and smart contract platforms
The vast majority of current DeFi projects are based on the Ethereum public chain. The most important reason is that the Ethereum blockchain construction has certain security, the underlying asset value, and developer ecological support.
The DeFi project is a Lego currency and it needs to have a good cornerstone. Although Bitcoin has the highest market value, it cannot be as flexible as Ethereum and it cannot build smart contracts with complex logic.
The market value of Ethereum gives it security, and it is a smart contract platform, which has led to DeFi's development on Ethereum. This can also be seen from the current major projects of DeFi.
Of course, does this mean that other public chains have no chance? Not necessarily, it's man-made. The core logic here is not tps, but security. Therefore, if other public chains are to reach or exceed Ethereum's DeFi, the first thing to do is to realize the security of the public chain. One of the core prerequisites is to increase the value scale of the chain. Looking forward to DeFi.
- DeFi participation and user habits
Since DeFi is license-free, it means that anyone with crypto assets can participate in DeFi. For example, if a user owns assets such as Dai, USDC, and ETH, he can deposit crypto assets into the DeFi project and earn interest income. These are usually done through operations on the chain, without the need for third party participation, and users have a great degree of freedom, convenience and speed of participation.
At present, through DeFi, people can realize loans, transactions, payments and futures, but for most ordinary users who do not have experience using crypto wallets, it has certain thresholds. It requires users to have some ability and experience in managing assets.
However, as more and more DeFi projects simplify their operation processes and become easier to use, once people use DeFi products, the difficulty of using them will gradually decrease. Once the usage habits are formed, more and more people will enter the field of DeFi.
DeFi project status
- From borrowing, DEX to derivatives
The current DeFi project involves loans, DEX, financial derivatives and other businesses. According to the size of the crypto assets locked at the time of writing, the total amount of locked crypto assets reached 686 million US dollars, of which nearly 2.7 million ETH and 1,400 BTC were locked. DAI has more than US $ 22 million, nearly one hundred projects have been run, and 16 projects have locked assets of more than US $ 1 million.
These 16 projects are also the main projects of current DeFi, including MakerDAO, Synthetix, Compound, InstaDApp, Uniswap, dYdX, Nuo Network, Lightning Network, Bancor, WBTC, Kyber, bZx, Nexus Mutual, Set Protocol, DDEX, Dharma.
- DeFi Big Three
If you look at the value of the current locked assets, MakerDAO, Synthetix, and Compound currently (at the time of writing of Blue Fox Notes) locked assets of $ 329 million, $ 176 million, and $ 99.6 million, respectively. These are the current three DeFi giants. There is a big gap between the project and the first three.
But the DeFi landscape is far from certain, with the addition of new smart contract platforms and the creation of new projects, this field has just begun. Therefore, the so-called "three small giants" are only temporary leaders at present, and more projects will stand out in the future.
DeFi will enter the history of cryptography because it truly matches products and markets. So far, there have been two product and market matches in crypto history, one is Bitcoin and the other is DeFi. Although DeFi is still very small, according to the current development trend of its "Lego Currency", it tries to build a field parallel to traditional finance and also combines traditional finance to realize new features. This is a very interesting and worth exploring in depth. field of.
Risk warning: All articles of Blue Fox Note can not be used as investment advice or recommendations. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct in-depth inspection of the project and make good investment decisions.