After a year of massive growth, DeFi (Decentralized Finance) has become one of the most important parts of the cryptocurrency industry.
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The term DeFi refers to all types of financial services provided on a decentralized platform.In fact, Micha Benoliel, CEO of Nodle, an IoT connection provider, told Finance Magnates:
"The ultimate goal of the DeFi community is to replicate banks and other entities and provide all services and functions in a completely decentralized, trustless and peer-to-peer manner."
The DeFi movement started with the development of a decentralized and trustless lending platform through Ethereum smart contracts. People then developed alternative financial services, such as synthetic assets (such as gold, diamonds, other currencies), derivatives and even decentralized exchanges. In addition to these services, stable coins are also included. These coins are coins (or tokens) that are linked to another asset (such as the US dollar) through various solutions to maintain a relatively stable value.
Cryptocurrency exchange Interdax CTO Charles Phan also explained to Finance Magnates that the term "refers to the use of open source protocols to make finance license-free, thus enabling things like on-chain loan markets, credit markets and identity Things like services. "
Dan Schatt, co-founder and president of DeFi company Cred, told Finance Magnates:
"For some, this represents the eventual dissolution of all financial intermediaries, in the same spirit as the creation of Bitcoin. The reality is that the financial world is running in a continuous process, and some are moving at a faster rate than decentralization. Others are fast. We are not there yet. Most people today don't believe in finance with purely decentralized management. "
"However, most people believe that the DeFi solutions that are best able to support mainstream customers are those that can deepen and integrate capabilities related to blockchain, capital markets, lending, borrowing and merchant services."
DeFi "means different people have different things"
Indeed, in a Finance Magnates interview published earlier this week, Kava Labs co-founder and CEO Brian Kerr stated that the term DeFi has evolved over the past year, and DeFi "means that different people have different things."
Last year, DeFi was all about decentralized exchanges-[most] exchanges are centralized, so if you create a DEX (decentralized exchange), it's DeFi. Blockchain is mainly discussed in the context of "decentralized payment or value transfer".
This year, however, Kerr said that when people say "DeFi," what they really mean is "prone to lending-and therefore the ability to create some kind of financial service provided by a bank."
DeFi grows significantly in 2019
How much is the DeFi industry worth? Although it's difficult to determine the total value of the DeFi segment in the crypto industry, there are some important statistics that show significant growth over the past year.
For example, DeFi Pulse is a website that collects data on DeFi projects on the Ethereum blockchain.It tracks the growth of funds invested in these projects, that is, "total value lock-in (TVL) to extract Ethereum held by these smart contracts. (ETH) and ERC-20 tokens. "
However, Graychain also reported that of the $ 4.7 billion in loans received from the DeFi platform, only $ 86 million (about 1.8%) received a return.
The growth rate of DeFi, especially the growth of crypto loans, is so fast that some analysts have suggested that this may be the second crypto bubble.
Bloomberg said in a report in October:
"Cryptocurrency credit is growing too fast and is facing an explosion. Now, a group of Wall Street traders are looking for the wealth of digital assets."
The report also cited Graychain's data representation:
"Just two years ago, an industry worth nearly $ 5 billion was just emerging, and the number of loan platforms was rapidly increasing."
Indeed, the main source of concern appears to be the fact that loans from most cryptocurrency lenders are being used as a roundabout for leveraged transactions.
After all, "if you are not a qualified investor but you are still trading cryptocurrencies, you will not be able to obtain lending products such as margin trading in the United States," Brian Kerr said.
"If you want, you can't get leverage on BTC, but it has been available in the past, but regulators have forced the exchange to stop offering the product to US customers.
Jason Urban, CEO of crypto-loan platform Drawbridge Lending, told Bloomberg that the credit risk issue "set him up late at night. Indeed," torpedoes below the waterline are Lehman-type incidents under the economic crisis. Urban is a former trader at DRW Holdings LLC and Goldman Sachs Group, Inc.
Will there be more growth in the future?
However, most experts seem to agree that the industry will not adjust soon, and 2020 is expected to be another year of growth for DeFi.
Micha Benoliel told Finance Magnates that the growth of the DeFi industry since 2019 marks a paradigm shift in the way most people look at banking: "DeFi represents a shift in thinking about people looking for alternatives to traditional banking systems. Meeting their needs." He explained.
"In most cases, the existing banking system is not performing well. Of course, there may be a trend in the future and the growth of DeFi may be slower, but this is a certain trend. Whether it is a bubble or not, DeFi will continue to develop Go down. "
How will the industry continue to grow? Benoliel says:
"I hope more and more financial products will have decentralized versions in 2020."
Indeed, Benoliel predicts:
"As more and more financial products continue to emerge in a decentralized form, this will bring unprecedented new users and use cases to the blockchain industry."
However, "as more supplies enter the market, the attractive interest rates offered may slowly decline," Benoliel said, although "they will definitely remain higher than the current level of the financial industry because there are no middlemen in DeFi at all . "
An obvious improvement that Benoliel sees about DeFi is the way things work on the front end of many platforms: "I think DeFi products, like most blockchain products, urgently need a better user experience. Actual It is still difficult for non-technical or 'non-active' personnel to understand or use these products today. "
2020: The dawn of "DeGov"?
Komodo's CTO Kadan Stadelmann said he doesn't see DeFi's astronomical growth throughout 2019 as a bubble. After all, "we have faced the severe test of a bear market for most of the year."
"I believe the entire market, especially the fintech industry, is exploring the capabilities of this promising technology, which is the main driver of the growth we have witnessed."
As for the coming year? Stadelmann saw growth, and the government entered DeFi.
"In addition to seeing more stablecoins supported by fiat currencies, commodities, and cryptocurrencies, we may also see the first truly government-backed DeF application in 2020. This sounds paradoxical, Because in fact (most) DeFi projects are designed to transform the traditional financial world into a decentralized architecture outside government control.
To this end, Stadelmann said:
"This could actually be a unique and independent layer, not DeFi, but DeGov."
This "DeGov" layer may manifest itself in several ways:
Cryptocurrency similar to stablecoin, known as Central Bank Digital Currency (CBDC), or it may be another 'decentralized and blockchain-based' financial tool and technology that can provide a strong form of decentralized autonomy . Banks and traditional fintech sectors will definitely join the "DeFi boom".
Government participation in DeFi may push for more regulations in this area, thereby further promoting the "legalization" of the industry. Stadelmann believes that this is necessary in order to make DeFi sustainable.
"DeFi requires more official and legal recognition to develop. There is also a need to raise public awareness of the technical and economic potential of this emerging and promising technology. As this layer, especially the technology itself, matures, and as With the involvement of "DeGov", we may see more use cases emerge, and then we will also see "big players" joining in. "
Will over-regulation kill DeFi or fuel it?
However, on the other hand, Pascal Thellmann, the CEO of CoinDiligent, a platform that provides guidance to cryptocurrency investors, points out that the relatively unregulated nature of DeFi (especially in terms of loans in the industry) may be the driving force behind this. The reason-this year's growth is so fast.
"The DeFi benefits from the over-regulation and inefficiency of traditional finance," Thellmann said.
"The ideal growth scenario for DeFi is that the government implements strict financial supervision legislation on traditional financial institutions, and traditional financial services companies cannot adapt to the increasingly digital economy."
In fact, Thellman also believes that regulation of some aspects of the crypto space itself has begun to drive the rise of DeFi: "The major exchanges are also under increasing pressure from regulators, which is forcing them to implement KYC and make their users more Strict monitoring, he noted. "For example, there are rumors that BitMEX will fully launch KYC in the first quarter of 2020. "
"So I think there will be a lot of liquidity from centralized cryptocurrency exchanges and OTC service desks to DeFi alternatives throughout 2020. The government continues this trend of over-regulation and the crackdown on crypto businesses may be in the coming years Go ahead and prove these are powerful catalysts for DeFi growth. "
Is DeFi a bubble? He thinks not,
"In contrast to Bitcoin or other cryptocurrencies, Bitcoin or other cryptocurrencies may enter a crazy price bubble that has little to do with reality, and DeFi is just a tool ecosystem, which means it grows from the tools in the ecosystem. The number of people seeking utility is directly related. "
Do you think DeFi's growth throughout 2019 is a bubble? What do you think of the industry in 2020? Let us know in the comments below.