DeFi weekly selection 丨 DeFi interest rates continue to fall, where is the market's breakthrough point?

DeFi content this week includes:

  1. Market downturn, DeFi interest rates continue to fall
  2. What problems does DeFi need to solve in the next 10 years?
  3. An idea to solve the problem of DEX liquidity
  4. Weekly DeFi event review

First, the market is sluggish, DeFi interest rates continue to fall

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Data from: DeFi Pulse

High deposit interest rates were once considered one of the attractive points of DeFi products, but since this summer, borrowing rates for DeFi applications have fallen sharply.

As of press time, Maker's lending rates were 3.5% and 4%, respectively, and its interest rate in October remained above 10%.

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Over the past few months, the interest rates of almost all DeFi applications have been steadily lowered, which is largely related to the recent downturn in the cryptocurrency market. The low interest rate environment is good for traders, but it is not good for DeFi applications that try to compete with traditional bank deposit rates.

2. What problems will DeFi need to solve in the next 10 years?

Original author: Synthetix founder Kain Warwick

People often think, "This technology is so superior. Why don't you adopt it?" But it is very difficult to actually change the deep-rooted behavior, so the transformation usually takes decades instead of years.

The second question is, can decentralized coordination replace capital more effectively than the status quo? This lacks clarity.

Finance is essentially the coordination of capital allocation so that it can be used most effectively. In the past five hundred years, the company has become the best capital coordination method in modern society. For many reasons, DeFi offers a compelling alternative model, but it is unclear whether it can replace every aspect of the existing financial system.

I believe it will eventually replace most financial coordination games, or at least force them to evolve into a new hybrid form to take advantage of the best features of DeFi and CeFi. I think the most critical reason is that effective capital allocation requires competition. In a market with low or no competition, efficiency is often very low. DeFi is a highly competitive alternative to corporate capital allocation. It reduces the barriers to entry for market participants and improves the efficiency of competition among market participants to a new level. In other words, DeFi means more competition, better competition, and thus a more efficient market.

What's missing in the DeFi market today?

This brings us back to the original question. Is it possible to eliminate the structural inefficiencies that hinder the development of DeFi ?

In the traditional lending market, the enforceability of contracts depends on the legal system, which ultimately depends on those who own guns and cages. If DeFi cannot use guns and cages to enforce these regulations, can it effectively implement under-mortgage loans? If not, what does this mean for the development of DeFi lending? My feeling is that it can be achieved, but there are still some shortcomings, such as decentralized identity , and privacy is another obstacle facing DeFi.

Despite these challenges, I believe that DeFi will continue to create new and efficient markets, but as long as these structural inefficiencies exist, DeFi will continue to operate in parallel with traditional finance. Today, most of the challenges facing DeFi will be resolved, and the emergence of a large number of DeFi protocols will make capital allocation more efficient. The next question is, what will it look like and what impact will it have?

Trustless protocol with predefined rules

This means you no longer need a company to coordinate capital allocation, and agreements can replace it. This lowers the barrier to entry because anyone who follows the rules can participate. It also improves efficiency because these rules are enforced by contract rather than by the legal system, and ideally they reduce risk and enforcement costs. But that hasn't reduced the threshold for creating new agreements, which may still be high, but perhaps most important is liquidity .

Challenges facing the new agreement

Liquidity is still the main challenge for the new protocol. Even the oldest and most well-known DeFi protocols in the industry (such as Augur and 0x), they are fighting liquidity today.

To thrive, DeFi needs to find a way to allocate capital to new agreements, thereby building strong coherence among the parties.

The meaning of composability

The last aspect that DeFi needs to consider is the meaning of composability, that is, the ability to connect to the DeFi protocol unconditionally.

Full original: https://bankless.substack.com/p/defi-in-ten-years

3. How to solve the liquidity problem of DEX?

Original author: Bancor Nate Hindman

If you hold a project's token, you can now easily get a portion of its liquidity on the DEX and charge a fee from its transaction volume.

The ability to lend tokens to exchanges and generate interest from the transaction costs of the exchanges not only brings new opportunities for users to earn passive income, but also fundamentally changes the way DEX operates.

Now, we can build a DEX where users are shareholders and effectively pool liquidity from bottom to top, that is, liquidity is obtained from users, not from whales or professional market makers.

At the core of this development is a new financial primitive called the liquidity pool. The so-called liquidity pool is actually an automatic market maker smart contract, which uses the on-chain reserve to calculate and exchange assets.

The liquidity pool forms an autonomous, decentralized incentive layer, allowing wider and more competitive participation in market making.

The DEX based on the liquidity pool is actually equivalent to the exchange owned by the user, of which:

  1. The core business of the exchange: the online token, order matching, and the circulation of transaction fees are all independently completed by a group of unlicensed smart contracts;
  2. Users add liquidity without a central entity controlling the process, so liquidity can be distributed to an unlimited number of unrelated parties;
  3. As a liquidity provider, participants are encouraged to promote more liquidity, because the higher the liquidity, the more traders are attracted, which creates more fees for the liquidity provider;

This is in stark contrast to the way exchanges currently work.

At present, more and more projects are starting to use the liquidity pool as a mechanism for deploying incentives to their token holders. For example, Synthetix regularly airs SNX to users who provide liquidity to its sETH: ETH pool.

And Bancor will airdrop the liquidity pool token ETHBNT on New Year's Eve, which will turn Bancor into a liquidity provider agreement. And such a DEX may look like a DAO organization.

Full text: https://medium.com/altcoin-magazine/user-owned-exchanges-1a212f20ea12?

Review of DeFi events of the week

1. Coinbase's cryptocurrency debit card, Card, adds Dai as its first stablecoin:

https://decrypt.co/14068/coinbase-card-now-supports-its-first-stablecoin-dai

2. The new sidechain project Echo wants to bring DeFi into the Bitcoin ecosystem:

https://blog.echo.org/bringing-defitobtc/

3. Chainlink successfully deployed SNX Feed to its main network:

4. Researchers reveal MakerDao governance challenges. The Maker Foundation intends to change governance rules:

https://www.8btc.com/article/528471

5.Bitcoin must also have a DeFi application. Startups launch Bitcoin version of MakerDAO

https://www.8btc.com/article/532297