312 plunge revelation: what is DeFi missing

Author: NEST lovers _ nine chapters Heaven

312 plummeted, and many people in the industry lost their confidence, especially in the DeFi field.

Taking the stablecoin project MakerDAO as a representative, because of the plunge of 312, the bond position of the mortgaged stablecoin appeared to break through (that is, the capital was not indebted), thus launching the MKR auction.

Throughout the process, various pieces flew around, some said that the assets were taken at a cost of 0, some said how much the loss was, some said the project was ended, some wanted to sue them, and even the foundation felt pressure to manage To the community.

It seems that the entire crypto community has doubts about whether DeFi can really be established.

This suspicion led to a collective reflection in the industry, many people wrote articles, summed up 312, strange phenomena and even more strange explanations. MakerDAO also made a lot of adjustments himself, including the way of liquidation, auction, etc. It is becoming more and more complicated, but there is only one purpose, which is to hope that when this situation occurs in the future, it will avoid the recurrence of the 312 incident. These starting points and original intentions are good, and we all hope that DeFi can be a virtuous circle, continue to develop, and truly enter the public's vision. But these summaries include MakerDAO's recent adjustments. I always feel that the soup is not changed, and it does not point to the core of the problem.

The current well-known DeFi, whether it is MakerDAO or Compound, is the so-called over-collateralization, price-limit closing mode. On the surface, over-collateralization and liquidation of the super-water mark are impeccable. But these designs are essentially options one by one! Since it is an option, it must involve three important variables, price, risk-free rate of return, and asset volatility.

None of these things originally belonged to the information on the chain. Because the influence of price variables is too significant, someone designed a scheme called the oracle, trying to pass the required price from the centralized exchange that represents the price discovery.

Regardless of MakerDAO or Compound, the price prediction machine is used. Then the risk-free rate of return and the volatility rate are implicit in the pricing formula and are not easily noticeable , so no matter which DeFi is in the current market, the design did not consider the possible volatility of the two, nor did it do in-depth Sensitivity analysis.

Let's not mention the risk-free rate of return first, because this variable has a smaller impact factor and the frequency of significant changes is lower. Next, let's talk about this volatility, which is a core variable that is generally missing in DeFi.

Volatility measures the volatility level of asset returns. It is often used in finance to measure the standard deviation of asset returns for a given period (commonly known as historical volatility, used to estimate implied volatility).

In option pricing, volatility is an indispensable and extremely sensitive variable, but in the current DeFi, this variable is hard-coded or adjusted through governance.

Take MakerDAO as an example, two important parameters ensure the stability of DAI: mortgage rate and liquidation line (clearance line), but these two parameters are not dynamically adjusted, that is, the contract is written at the beginning, such as mortgage 5 Fold, close to 20% off. If you want to adjust this index, you need so-called on-chain governance, not the system changes automatically.

In the same way, we borrow money in Compound. Over-collateralization, limit price closing, the mortgage rate and position line are determined in advance and will not be adjusted automatically.

However, under normal circumstances, the design of these two variables is reasonable, but when the volatility rises sharply, there will be a very realistic challenge to do so: to cross positions. Once you pass the position, you still have to ensure the stability of the DAI, it is impossible, and the function of the stablecoin will gradually fail . Because the change in volatility is not as obvious as the price change, and it is often relatively stable, so in most cases, these DeFi can operate steadily and automatically balance. Even if Ethereum fell from US $ 1400, MakerDAO was able to cycle normally, and the scale of the mortgage even continued to grow. Everyone felt that this reflected the greatness of decentralization.

However, no matter how lucky you are, MakerDAO's processing is ultimately missing one variable and there is no feedback on the volatility indicator.

This problem also exists in the AMM scheme we will mention later.

At a more abstract level, one less variable of the basic dimension allows participants to provide constrained information for gaming. Eventually, even if an equilibrium can be formed, it is also an incomplete information equilibrium. Such equilibrium is mostly unstable : under some disturbances Once it deviates from the track, it may never come back, causing some participants to withdraw and the market to end.

For example, this time 312, MakerDAO could not handle the sudden surge in volatility. The original closing position was broken by price fluctuations in a short period of time, which eventually caused some debt positions to become insolvent. Due to this risk-sharing mechanism, the intrinsic value of all DAIs has depreciated. In order to maintain the stability of the stable currency, the MKR auction method is used to manually restart, which is far from the spirit of DeFi. Therefore, the MakerDAO Foundation was also aware of this problem later, and could not take responsibility without giving it to the community.

In fact, as a true DeFi agreement, he does not need to charge or govern. It is just a standard like the ERC20 agreement. The premise is that the agreement should fully reflect all the variables of the service, instead of responding with a model that lacks the most. The complicated economic world.

Although we have only cited the example of MakerDAO, the problems we have revealed are common. The lack of volatility makes all mortgage agreements go back to the old path of MakerDAO. This has nothing to do with luck. In the financial field, I only believe in logic, not luck. Sooner or later, you will have to pay back. So good luck today will lay the groundwork for tomorrow's stepping on the pit.

In the end, only logic and law can save you.