Opinion: Three major issues to be addressed by DeFi
For DeFi, 2019 is a watershed year. We have seen a 30-fold increase in the number of DeFi users and a total of more than three times the total borrowings locked by DeFi. MakerDAO is the first and most important player among DeFi players, it has occupied the main market share, and other platforms, such as Compound, dYdX, Uniswap, have also reached a breakthrough moment. (Blue Fox Note: Synthetix needs to be mentioned here, and its locked assets have ranked second in DeFi. For details, please refer to the original article "Blue Fox Note Synthetix ")
Wallets like Coinbase and Argent are now also providing equivalent dollar-denominated storage accounts, all of which are settled on the public chain.
Only a year ago, DeFi was an obscure concept with a little speculation. Now, few people doubt that DeFi will become an integral part of the public chain.
However, DeFi is still in its very early stages. Most products are relatively simple: over-collateralized borrowing (traditionally called secure mortgage), simple on-chain settlement exchanges (such as Uniswap and 0x). The mortgage rate of DeFi products is around 150%, which means that borrowers need to provide mortgage assets that are 50% larger than the value of the loan.
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This is a good start, but we still have a long way to go.
Bloomberg columnist Matt Levine often claims that the crypto world is replaying the history of modern finance, but only in an alternative, accelerated timeline. If this is true, then DeFi today can be compared to the medieval Venetian banking industry, which was just beginning. In a busy port city like Venice, long-term credibility is rare and is usually a one-time transaction. There is not much room here to build identity and credit. In this scenario, a mortgage and a large margin are generally required to ensure the safety of the loan.
This is where we are today at DeFi: everything is over-collateralized and the lender knows nothing about the borrower. These protocols completely ignore any data, reputation, and iterative development. DeFi introduces what is missing: a truly Internet-native finance.
So what happens next? There are many areas where DeFi needs improvement, but for 2020, there are three major priorities:
Reduce mortgage rate
First, improve capital efficiency by reducing excess mortgage margin. Most consumers have a down payment of 5-20% on their mortgage loans, which makes the overall mortgage rate between 105% and 120% (because the house itself is already 100% mortgage). 150% of excess mortgages are unheard of in the normal financial world.
Why is the mortgage rate so large? There are two main reasons: volatility and latency.
Because volatile crypto assets are used for collateral, lenders need to protect them from the risk of a sudden drop in the value of the mortgage asset. Over time, it is possible for crypto assets to mature and become less volatile. But even if this is unlikely, you can reduce volatility by introducing more stable mortgage assets, such as stablecoins, gold-anchored tokens, or other digital securities.
Even more worrying is the delay: if you see a decline in the value of mortgage assets, how can you quickly liquidate the loan to ensure the safety of your loan funds? After all, if the assets of the DeFi borrower become negative, you cannot recover funds from them through the blockchain, they just give up their addresses on the chain.
In this case, the latency problem of the underlying blockchain is a major issue. If you can reduce the block time in PoS (or better, put the DeFi application into layer 2) and use a more professional keeper or market maker network, then these systems will be able to clear the mortgage assets faster.
These measures will make their mortgage rates close to those of traditional finance. The 50% margin is very large, mainly because, for now, it is possible for the value of the mortgage asset to fall by 33% before the system completes the liquidation position. With faster liquidation speeds and more stable mortgage assets, the excess mortgage rate may drop a lot.
Increase synthetic asset diversity
After reducing the mortgage rate, DeFi's second priority is to increase the diversity of synthetic assets. Looking at MakerDAO, MakerDAO generates Dai, a synthetic stable dollar anchored in dollars, which does not have an actual dollar in its system. All that is needed is the price flow of ETH / USD.
If we just exchange the price stream for ETH / gold, then we can generate synthetic anchor gold tokens, and the generation mechanism is exactly the same. Both the Maker and UMA agreements are pursuing this goal, and we expect that we will soon see a wide variety of synthetic financial assets. In the future, anyone with a mobile phone will be able to purchase any financial asset they want in this world, and all this is done through crypto assets.
Finally, DeFi will need to evolve iteratively. Instead of treating each user as a blank, the agreement will consider the user's long-term on-chain cash flow and assets that generate revenue. If your address performs well on other DeFi platforms, you are eligible for lower rates and better credit. Ultimately, we should be able to introduce a robust form of identity into the blockchain by connecting with the real world.
Identity is a prerequisite here. After all, when it comes to borrowing, blockchain is different from the real world. If you default on real-world debt, you must declare bankruptcy and waive your credit for at least seven years. On the blockchain, you can just discard the default address and re-enable the new address without any disadvantages. When users can generate new addresses for free, it is impossible to force someone to do something. It's like asking people to rename and restart their credit score after they declare bankruptcy.
So we need stable and expensive identities. However, if we wait for this service from regulatory agencies and other identity brokers, we may always wait. It is more likely that, as advocated by Balaji Srinivasan, we will build a bridge between the individual's blockchain and Web2 identity, so that there is no need to wait for the institution to participate.
If we can use Twitter or Facebook reputation to support individuals' credit records on the blockchain, then we can build a pure digital credit system. When it comes to privacy and k anonymity, there are many unresolved issues here, but in principle it is feasible.
The Internet has overturned the monopoly of almost every industry, but to a certain extent, finance has not been hit too much. DeFi introduces what is missing: a truly Internet-native finance. Ultimately, it will have an impact on finance, just as the Internet does to other industries.
But it's too early. All of these products are experimental and will no doubt fail. However, the innovative power without permission will inevitably make DeFi come.
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