Cao Yin: An economic crisis or an important opportunity for the rise of DeFi in an epidemic

The New Crown epidemic is raging globally. At present, except for East Asia, the epidemic is still spreading rapidly in all countries. Although the governments of various countries have done everything they can, no one knows when the epidemic can be controlled. For most people who are not sick, what is more terrible than the virus is where the severe economic and financial crisis caused by the epidemic took us after the epidemic. Some blockchain practitioners even began to doubt the meaning of their blockchain career because the technology could not help.

Figure: MetaCartel member PeterPan doubted the meaning of the blockchain on Twitter and expressed his intention to completely leave the Ethereum community and digital currency

I believe that practitioners with this suspicion are not just PeterPan. Under the double blow of life threats and asset collapse, the morale of domestic and foreign communities is relatively low. Everyone is asking themselves: What can the blockchain do?

As a DeFi practitioner and investor, I have no doubt at all, and I am full of confidence. Not only is I confident that mankind will eventually overcome the epidemic, but also that DeFi can help people who have been hurt by the crisis. In fact, I am more optimistic. In general, the economic and financial crisis caused by the epidemic will not only affect DeFi, but may even become an important opportunity to detonate DeFi.

Let me first analyze the consequences of the economic and financial crisis that the epidemic may cause.

Demand for the dollar surges, investors sell assets for dollars

Since the epidemic broke out all over the world, companies and investors are worried that the spread of the new coronavirus will cause economic stagnation, so they seek the most liquid currency. The indiscriminate sell-off in the financial markets has set off. Stocks, gold, foreign exchange, commodities, developed country and emerging market bonds have all been sold, exchanged for dollars in order to avoid risks, although the Fed has urgently lowered interest rates to zero and launched a new A bond purchase plan, but the dollar index, which reflects the exchange rate of the dollar, is still rapidly rising above 100. Other central banks have taken similar measures, but so far these measures have failed to contain liquidity tensions and market panic. The dollar index remains high.

Pressure to depreciate local currency, countries adopt strict capital controls

In the capital market, investors have dumped currency assets of various countries in order to cash in dollars to avoid risks. For a time, major international currencies such as pounds, euros, Australian dollars, Singapore dollars, and Swedish kronor have depreciated against the dollar, while Thailand, South Africa, Mexico, Turkey, Egypt The currencies of developing countries have depreciated significantly, showing investors ’worries about the economies of these countries. Countries that rely on external financing may face a sudden cessation of capital inflows and disorderly markets, and thus implement temporary capital flow management measures. For example, the Egyptian government recently began implementing capital control measures to restrict the exchange of local currency to US dollars. Under the pressure of the epidemic, even the bearer of the free flow of capital, the International Monetary Fund has loosened its attitude towards the capital control policies of sovereign countries. In the IMF's new "Comprehensive Policy Framework", it has been proposed that tolerable sovereign countries Temporary restrictions on capital flow.

Economic depression, major economies will maintain low interest rates or even zero interest rates for a long time

Due to concerns about the impact of the epidemic on the economy, since early March, the central banks of more than 30 countries such as Canada, New Zealand, Australia, the United Kingdom, and Egypt have announced interest rate cuts, and the Fed is in one step. All the bullets are burned at once, which is directly reduced by 100 basis points. The federal funds rate fell to a historical low of 0-0.25%. If the liquidity panic in the market still cannot be alleviated, or in order to stimulate economic growth in the post-epidemic depression, the Fed and other central banks may even adopt negative interest rates. This will have a long-term structural impact on global capital markets.

The risk appetite of the whole society has dropped sharply, saving has become an important way of life

According to historical experience, after major disasters and economic crises, investors ’risk appetite will drop significantly, various types of capital expenditures will also drop sharply, and non-essential living expenses of ordinary consumers will also drop sharply. The savings rate of the whole society will increase significantly, especially the consumption concept of the people in Europe and the United States will be completely changed. Many moonlight families will have to save money, live within their means, and change from a credit card lifestyle to a savings card lifestyle.

Economic + financial crisis, banks in developing countries are on the verge of bankruptcy

All major financial crises have led to the bankruptcy of a large number of financial institutions, including many types of banks. After the Asian financial crisis in 1997, a large number of banks in Southeast Asia went bankrupt, resulting in the loss of many people's savings. The epidemic crisis has cut off the international supply chain and trade in goods and services. After the epidemic, many multinational companies will also rethink their supply chain strategies, which may cause many production capacities to leave developing countries and return to Europe and the United States. This will lead to the bankruptcy of a large number of enterprises in export-oriented countries. At the same time, it will also cause the exchange rate of these countries to continue to depreciate and increase the external debt burden of these countries. Banks will be under pressure from both the asset and liability sides, and the weaker banks will go bankrupt and lead to systemic risks.

The consequences of the above crisis will hit the global economy, especially export-oriented developing countries. The DeFi on the blockchain will suddenly emerge due to its special attributes and functions, and overcome the crisis tit-for-tat, helping more people cope with and even get rid of the impact of the crisis, and become a "special effect medicine" to overcome the crisis.

The safe-haven dollar flooded into a centralized stable currency, and potential financial management demand triggered DeFi lending

The total amount of various types of centralized USD stablecoins rose during the epidemic period due to market risk aversion. According to statistics, in March alone, the market value of various types of centralized stablecoins increased by approximately US $ 2.1 billion, totaling US $ 8 billion. And for now, the rate of additional issuance is still increasing. The demand for additional issuances comes from speculative demand from dips in BTC, and there are also many private hedging needs from buying US dollars in other currencies through special channels and converting them into various US dollar stable currencies. For example, a large number of US dollars have used bills receivable. The way is generated in the foreign trade link to help the capital control countries' funds go abroad. Recently, due to the epidemic, international trade has been blocked, and a small part of these daily dollar circulation needs have flowed to various dollar stable currencies.

Chart: Total Issuance of Various Stable Coins

As the stock of stablecoins continues to increase, there is a huge financial demand for a large number of idle centralized dollar stablecoins. Most of these stablecoins are ERC20 tokens issued on Ethereum, such as USDT and USDC, which can be directly in the existing DeFi Borrowing and generating interest and transactions within the agreement. And more and more DeFi agreements are also aware of the financial needs of centralized stablecoins. The mainstream DeFi lending applications Compound, Lendf, Aave, and dydx have recently started to support various centralized USD stablecoin lending services. At present, the total amount of centralized stablecoins entering DeFi lending is less than 150 million US dollars. As holders of various stablecoins realize the liquidity advantages and security advantages of DeFi lending, a large number of centralized stablecoins will enter DeFi lending and wealth management in the future live.

Figure: Various stable currency loans on Lendf

DeFi payments and transactions will become green channels for capital-controlled countries

Although capital control is out of the need to protect financial stability, it does seriously affect the normal trading and investment needs of enterprises and individuals, especially in countries with relatively backward financial infrastructure, such as Egypt and Vietnam. Capital control will make it impossible for citizens International financial infrastructure is used, and the domestic financial infrastructure is not perfect enough to provide reliable basic financial services, such as cross-border transfers and financial asset transactions. And DeFi's borderless and censorship-resistant features allow users in regulated countries to use DeFi for cross-border and domestic payments and transactions, and even invest in DeFi synthetic assets to participate in international financial markets.

Figure: USDT trading options on Tokenlon decentralized exchange

A large amount of zero interest rate funds will be converted into stable coins to enter DeFi for spread arbitrage

The low and zero interest rate policies of various countries will be maintained for a long time, and even negative interest rate policies will be introduced. There will be many arbitrageurs who choose to carry out interest spread arbitrage between bank loans and DeFi deposits, and the high liquidity and security of the DeFi market makes similar arbitrage strategies nearly risk-free, which will attract a large amount of capital outflows from banks through Stablecoins enter the DeFi market.

In addition, after the epidemic, the international capital market will be deeply reconstructed along with the international supply chain, and the capital control policies of related developing countries will continue to increase. Therefore, in a new normalization of deglobalization, development The spread between countries and developed countries will become larger and larger, and borderless DeFi will become the best tool for international arbitrage capital to carry out cross-border spread arbitrage.

Figure: DeFi loan application balance of stable currency deposits and interest rate levels

Users will find that DeFi savings are safer, more profitable and more flexible than banks

After the epidemic, the already fragile developing country ’s financial system will become more fragile. Ordinary people ’s deposits in local banks may disappear at any time. During the epidemic, Yes Bank, India ’s fourth largest private bank, declared bankruptcy, resulting in millions of customers. Of deposits are in danger, and similar situations will frequently occur in developing countries in the future. At that time, people in developing countries will find that it is not safe to store money in banks, and buying stable currency in DeFi is not only safe, but also avoids the risk of depreciation of local currencies.

Recently, many projects have begun to provide DeFi deposits and withdrawals and savings services. From this year, Dharma provides one-stop DeFi services for users in some countries with free deposits and withdrawals + Compound deposits and interest + payment. Users can directly use bank deposits through Dharma wallet Purchase DAI or USDC and deposit into Compound. Dharma's services are not only safer than banks, but also have higher interest rates than banks, and even UI / UX do better than banks, which will be very attractive to ordinary savings users.

It is not only Dharma that sees the opportunity of DeFi savings + payment. The startup project Dipole launched stable currency electricity sales and DeFi savings services for the distributed solar market in Southeast Asian countries. On the OTC that Dipole accesses, users directly purchase in local currency including Various stable currencies including Dai, and choose to deposit in different DeFi loan agreements to generate interest. When electricity needs to be paid, they will be paid in stable currency. For electricity sales users, electricity purchase users pay stable electricity costs It will be automatically deposited into DeFi loans to generate interest, greatly improving the efficiency of capital utilization for both power purchase and power sales.

Figure: Dipole's product interface

According to the above new trends, DeFi projects in the following directions will take the lead in this crisis.

Stable currency deposits and withdrawals

Provide low-cost stable currency and fiat currency exchange services in a simple and convenient way, such as Dharma. By accessing the third-party deposit service Wyre, users can purchase USDC and DAI directly with bank cards at zero cost. However, there are still a lot of gaps in the regional coverage of Dharma services, and it is not possible to purchase the mainstream stablecoin USDT, and after depositing, you can only choose Compound to manage money.

Stable Currency Management

Help users to manage stable currency assets on the chain, and provide a variety of low-risk floating interest rates or fixed interest rate wealth management services including loan interest generation and liquidity interest generation. Currently, mainstream DeFi lending applications have provided similar services, but the best It is China's Lendf, which provides a variety of stable currency management services including USDT. The balance of stable currency deposits on Lendf has exceeded Compound.

Stable currency payment / collection

Help users to directly pay the financial assets in the DeFi agreement to the contract address of the payee through QR codes, SMS and other convenient methods. For example, Dipole provides electricity payment collection services in Southeast Asia.

Community Mutual Assistance

Realize mutual financial assistance between users in the form of DAO, help informal employment people who cannot obtain credit support and social security to obtain mutual financial assistance services similar to insurance, and participants can adopt a combination of off-chain governance + on-chain governance to ensure funds Proper implementation of delivery and recycling, and resolution of disputes. Mutual assistance funds can be directly deposited into the DeFi wealth management agreement to generate interest, ensure the efficient use of funds, and avoid the problem of misuse of mutual assistance funds by managers of traditional centralized community mutual aid organizations.

Liquid assets of fixed income

Through the combination of off-chain + on-chain asset clearing, preservation and quotation, it provides on-chain mortgage discounted DeFi services for various traditional fixed-income assets including bonds, bank regular savings, and ABS, helping small and micro enterprises and developing countries Assets are financed and provide stable and risk-controllable high-interest returns for DeFi stablecoins. At present, DeFi projects have begun to try similar services, such as the real estate tokenization project RealT. Users can invest in the real estate project equity share of the tokenized real estate project through RealT and obtain part of the rental income. However, RealT has not solved the most important problems of similar projects, how to ensure the continuity of off-chain rental cash flow, and how to preserve off-chain assets.

Figure: RealT's fixed income projects under financing

in conclusion

After each major crisis, some old industrial ecology will be destroyed, and new formats will be born from the rubble. The last Sars crisis directly gave birth to the prosperity of the online shopping industry after the outbreak. After the 2008 financial year, many large financial institutions were seriously injured, giving Internet finance the opportunity to let go of growth, and this time the outbreak, the number of virus infections and dead will far exceed Sars The breadth and depth of the resulting economic crisis and financial crisis will also exceed that of the 2008 financial crisis, and new market demand after the crisis is bound to exceed that of the past. DeFi, as the next-generation financial infrastructure built on the next-generation Internet, will officially enter the room after this unprecedented global epidemic + economic crisis and become the mainstream, providing real inclusive, safe, credible and reasonable Financial services.