Author: Mr. Zhang
Source: Crypto Valley
Borrowing is an old business, very old and old. Ancient Chinese books record that in the history of the Jews, the red-headed businessman Hu Xueyan started his business from a money bank, and modern bankers started by borrowing money as leverage.
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A very similar financial history is happening in the field of digital assets. The emergence and prosperity of centralized lending, the innovation of decentralized lending.
Who will be the next player in the lending market?
The essence of the lending business is: "Customers who have cheap funds in one hand and borrowing needs in one hand"
Whoever masters both, who masters finance, is a resource.
According to the logic of "resources", the most powerful lending companies in the digital asset circle are undoubtedly the centralized lending companies relying on very large mining pools:
Behind PayPal is the Coin Printing Pool
Cobo is behind the fish pond
Behind Matrixport is Bitmain
These giants have grasped the most important borrowing demand of the currency circle-the borrowing demand of miners.
What's more important is to grasp the borrowing needs of BTC miners. BTC miners supported the early borrowing market in the digital asset circle.
When DeFi Open Finance sounded its horn, it wanted to redefine trust in a decentralized way, instead of trusting centralized entities, but trust codes.
Where will the open financial trend of DeFi go?
The collateral on Compound, the largest decentralized lending platform, is about $ 100 million (data source DeFipulse), and the other decentralized lending platforms are not large.
The centralized lending platform alone is the PayPal family which claims to have more than 200 million US dollars of loans last year and 350 million US dollars of deposits. Foreign Nexos claims to accept more than 1 billion US dollars of loans. There are many large platforms such as BlockFi, Cobo, Maxtrixprot , Celsius. (PS: Isn't centralized data transparent?)
Judging from the data, the decentralized lending market is far behind the centralized lending. So why is there such a trend as DeFi?
In addition to the redefinition of trust mentioned above, DeFi, which carries the banner of open finance, aims to link the global capital market and bring cheap money from Americans, cheap money from Japanese, and cheap money from Europeans, through the value of digital assets The shifting advantages are back to the borrowing needs of developing countries.
In fact, developed countries cannot find a better investment target. Hot money is invested overseas, and digital assets have opened the door to capital flows.
The benefits of DeFi open finance are:
DeFi is an agreement. After business development, it will have a global network effect. The lending business is no longer limited to a region, but a global market. Both borrowers and depositors can come to the world.
2. Marginal cost is very low
This is the short board for centralized lending, and the marginal cost of each expansion is high. (The cost of business personnel expansion, the cost of compliance in each country's market, the cost of personnel in each region)
From this perspective, decentralized lending is a very valuable thing.
Deposits are created by borrowing. Borrowers are willing to pay interest because of real business expansion needs. With interest, depositors are willing to deposit. The base of the entire currency is enlarged, and the size of the lending market is enlarged.
The scale of borrowing depends on the total amount of collaterals. In the traditional financial world, the value of collaterals can be infinite, just to evaluate the amount that can be lent according to each collateral.
However, the soil of DeFi's open financial lending market is very barren. The lack of collateral is an unavoidable problem. Miners with BTC cannot borrow American money through DeFi. People with other mainstream digital assets borrow through DeFi. Not European money.
The fundamental reason is that open finance is built on Ethereum, and the best and most widely accepted collateral on it is Ethereum (market value of $ 16.7 billion). The ceiling of the collateral is very obvious, and the amount of borrowing is quite obvious. The size of the borrowing market will not expand.
In the future, more assets will enter Ethereum. Once the total type of collateral is rich and the value is increased, the soil of DeFi open finance can grow more possibilities.
More assets such as ERC-20 BTC, gold token PAXG, direct bond issuance on the chain, and the introduction of various off-chain assets. (The Makerdao team is doing it)
The most direct of many assets is BTC.
BTC has actual demand for borrowing
The borrowing demand of BTC miners is much larger than the borrowing demand of Ethereum miners. From the market value point of view, BTC is about eight times the collateral of Ethereum, and even more so from the future demand of mining machines. (Ethereum is preparing to transform from PoW to PoS, the expectations of miners are no longer there, no need to borrow to add new equipment, and BTC's computing power competition has always existed)
ERC-20 BTC is bound to be the next trend in the currency circle
Take a look at the existing ERC-20 BTC
1. WBTC, the earliest ERC-20 BTC solution, was led by Kyber and Bitgo, with a circulation of 600 in one year.
2. imBTC, in the past month, the imToken team has used the issuance mapping method (similar to WBTC) after escrow, plus imBTC's holding interest-generating method as an incentive. There are currently 120 circulations.
3. TBTC and V are optimistic about the decentralized solution. From centralized escrow to smart contract escrow, BTC issuance has two links, "deposit" and "issue after verification". Through the deposit mode, it is guaranteed to deposit into individuals And the verification node does not do evil, and at the same time, a part of the fee is used to stimulate the verification node. At present, it is still in the experimental stage, and the main network is not yet online.
Other exceptions: ChainX's xBTC is built on the Polkadot ecosystem.
Regardless of whether the above is a centralized or decentralized ERC-20 solution, it is difficult to get up in the short term. There are incentives and trust issues. There is a lack of a catalyst for forcible promotion. However, 10,000 and 20,000 BTCs may bring different changes to DeFi open finance. More lending platforms are willing to access (with borrowing liquidity), and exchanges are willing to access (with trading) Liquidity), so more derivative financial products have become liquid.
The entry of 10,000 BTC can generate collateral assets of 70 million U.S. dollars. Compared with the total of 2100 BTC, a 10-fold or 100-fold increase in DeFi open financial collateral can be expected.
The forced catalysis of ERC-20 BTC is more likely to be led by giant players such as exchanges. By issuing part of the BTC assets in the exchange in a centralized manner, ERC-20 BTC can officially enter the DeFi market, such as domestic Of the three major exchanges, or foreign Coinbase or Bitfinex.
Benefits of giant players doing this
1. As the issuer of ERC-20 assets, it can create demand for its transactions (DeFi's borrowing, deposits, there will be demand). In the past, Bitfinex Exchange, through its role as an issuer of USDT, had flow that other exchanges did not have. Sex.
2. Strengthen their own ecology. For example, the exchange wants to develop its own public chain in the future, and supports its own DeFi system and stablecoin. ERC-20 BTC as a resource can attract more DeFi projects to build on its own ecology.
(PS: Binance's BTCB is a practice that wants to strengthen its own ecology, but what Binance does not want to understand is that there is no complete DeFi ecosystem on the Binance chain, and this cycle has not turned around).
In the past, only centralized lending was able to undertake the lending business of BTC miners. The decentralized lending market was troubled by BTC's inability to serve as on-chain collateral;
In the past, the centralized lending that entered the market early has formed a scale effect (first-hand funds and first-hand miners). It is very difficult for new entrants to compete. Now new entrants can find the initial liquidity through the underlying access to the decentralized market. The decentralized lending market has Borrowers and depositors from all over the world can rely on this to re-optimize their services to grab the market;
In the past, centralized lending achieved high profits through monopoly, high borrowing rates and high deposit rates, and there was a lot of operational space in between. This time, the amount of space can become the profit of the platform. In the future, the supplier of funds will come from the world. The profits of centralized lending platforms will continue to decline.
PS: Centralized lending platforms also face compliance issues in China.
1. Dharma chose Compound (DeFi protocol) as the bottom layer. The Dharma team is dedicated to product services and traffic. In the future, it will also guide non-currency users to deposit and loan through the legal currency channel. In this model, Compoud earns 2.5 million borrowers. The interest margin is used as profit, and Dharma seeks a monetization model after there is traffic.
2. An exchange chose Lendf.Me (DeFi protocol) as the bottom layer. The exchange provides users with financial products that are sticky and also earns a portion of the interest margin. The business model of the Lendf.Me team relies on the lending market to grow, and through ecological Make money with the platform currency DF, (in the cooperation here, because the Lendf.Me protocol does not make money from the lending market, there is more room for cooperation with centralized institutions).
In the future, the DeFi protocol will gradually sink, and various middle layers or application layers will emerge (the picture is not public, and we will talk to us privately). The middle layer is to allow third parties to access the DeFi protocol with more independent control. The application layer builds products based on user needs.
Other possible combinations
BTC or ETH is a leveraged product of collateral. PTC users BTC or ETH can find cheaper sources of funds in the decentralized world, and the exchange earns intermediate interest differences. Take Huobi as an example. 0.098%, the interest is calculated by the hour, and a simple calculation of the cost of a month's borrowing is about 3%, while the decentralized lending agreement Lendf.Me had less than 1% of the interest on the borrowing last month, there is room in the middle. (PS: The premise is that the exchange does not inflate the assets to the user's leveraged transaction, but really provides the user's real assets, otherwise the exchange has no cooperation opportunities)
Centralized lending company
Similar to the cooperation methods mentioned above, newly entered centralized lending companies can work with the DeFi agreement team to make good products to serve miners, and strive to drive demand for funds and borrowers. In terms of profitability, centralized lending companies rely on earnings. Taking the interest margin, the DeFi team such as Lendf.Me relies on the borrowing ecology to increase the value of the Token, so that there is no conflict of interest cooperation model, and the two parties can also share on BD resources.
3. Decentralized wallet
As a traffic entrance, DeFi is one of the few wallets that can monetize (except for games). By establishing an intermediate layer on top of DeFi, a decentralized wallet can provide users with better services and charge certain fees after they have traffic. Proportional expenses are profitable. The actual borrowing behavior of users is the underlying DeFi protocol.
The cooperation modes mentioned above are based on sufficient understanding between the two parties. The Compound team also mentioned that in the future, it will assist exchanges in establishing a lending system, DeFi's open financial operation method, generating interest methods, and finally how centralized institutions package products. There are many possibilities and ideas among them.
Finally, look at the trends brought by ERC-20 BTC. The battlefield for on-chain assets in the future will be China, because China gathers most BTC miners.
Who can provide miners
1. Cheaper borrowing costs (via DeFi agreement);
2. Better service (centralized team service);
3. Higher trust (centralized or decentralized).
Whoever has the opportunity to stand out in the next competition in the lending market.
It is foreseeable that with the free flow of capital, borrowing will become cheaper and interest on deposits will become lower and lower.