DeFi Outlook: The future of the "code world" dominates?

Guide

In August 2018, Dharma Labs co-founder and COO Brendan Forster published an "Announcing De.Fi, A Community for Decentralized Finance Platforms" announcement of DeFi (Decentralized Finance, translated into decentralized finance or open finance) Born.

Summary

DeFi has gone through the transition from “serving the financial industry” to “completely changing the financial industry”.

The concept of DeFi is hot, and the financial industry is the key development direction of blockchain technology application. The excellent market performance of the recent head project has made “DeFi” more popular.

Finance is the core of the modern economy and can be divided into four categories: monetary and financial services, capital market services, insurance, and other financial industries . The corresponding financial intermediaries are banks, securities companies, insurance companies and trust companies.

DeFi and financial/financial intermediaries can complement each other. DeFi's indiscriminate but conditional access is likely to further expand financial coverage; DeFi uses blockchain technology to improve transaction data transparency, ensure transactional irreversibility and a certain degree of review resistance, and prevent hostile inflation in the regime. Have certain advantages.

But DeFi and Finance are at a loss when it comes to covering all users. In addition, DeFi is inevitably facing the risk of technology and application.

Since the emergence of the DeFi concept, there are currently thousands of eligible blockchain projects, mostly concentrated in the areas of issuing certificates, financing, transactions and related financial instruments.

The blockchain project MakerDAO has the functions of issuing stable certificates and mortgage financing, and initially has the prototype of “pass-through bank”. However, the distribution mechanism of MakerDAO CIS has a single function, which is doubtful about the role of real society, and there are volatility risks and liquidity risks.

We believe that DeFi is a useful complement to the current financial industry. Later, with the maturity of DeFi and the iteration of blockchain technology, DeFi will play more and more important roles, and even the financial system that dominates the future "code world" is unknown.

Risk warning: regulatory policy, technical iterations are less than expected

table of Contents

1 DeFi's wild vision

1.1 DeFi: From improvement to revolution

1.2 DeFi heat is gradually improved

2 Cooperation and win-win competition

2.1 Finance is the core of the modern economy

2.2 DeFi and financial/financial intermediaries: complement each other and disadvantages

3 Summary

3.1 The number of DeFi projects is large, with the ETH public chain as the main position.

3.2 The Forerunner of “General Bank”: MakerDAO

3.3 DeFi: The dominance of the "code world"

text

In August 2018, Dharma Labs co-founder and COO Brendan Forster published "Announcing De.Fi, A Community for Decentralized Finance Platforms" to announce the birth of DeFi (Decentralized Finance, multi-translation for decentralized finance or open finance) .

1 DeFi's wild vision

1.1 DeFi: From improvement to revolution

The concept of DeFi has been iterative, and has evolved from the initial “financial reformer” to the “financial revolutionary”. Blockchain technology has begun to transform from serving finance to reshaping finance.

BrendanForster has a basic definition of DeFi: DeFi is a decentralized financial platform community. The projects in the community need to meet four conditions. “ Using blockchain technology, serving the financial industry, open source code, and a certain size developer group. ". According to the above definition, Brendan Forster sorted out the DeFi-based project based on the ETH public chain. To date, Brendan Forster's definition of DeFi is still very influential.

After entering 2019, benefiting from the continuous improvement of the blockchain industry ecology, the industry has expanded the connotation and extension of DeFi: the use of open source software and decentralized networks to transform traditional financial products into a non-trusted and transparent agreement . Accordingly, DeFi includes not only open source blockchain projects that serve the financial industry (or provide financial services) based on the ETH network, but also Bitcoin, Stellar, etc. that issue certificates and pay for settlement.

1.2 DeFi heat is gradually improved

The blockchain or the parent of a new concept such as the class "DeFi". Bitcoin has been produced for only a decade, and the word blockchain has been updated. After the "Internet" was born, many concepts and vocabulary based on Internet infrastructure or applications sprang up. The concept of "blockchain" is likely to become the mother of the "new concept" in the near future. It is not surprising that Decentralized Finance is the same as the new concepts such as Decentralized Education, Decentralized Storage, and Decentralized Communication.

The financial industry is the key development direction of blockchain technology applications, and more than one-third of the blockchain projects can be classified as DeFi. According to the definition of finance in the academic circle, and according to the BICS (Blockchain Industry Classification Standard) classification, at least 38% of the current top 1000 market capitalization projects directly serve the financial industry, including non-bank financial , wallet & transaction, certificate management, stability certificate, banking services and payment settlement.

The excellent market performance of the DeFi class head project makes "DeFi" more popular. MakerDAO is currently the DeFi class with the highest ETH network listing value. According to CoinMarketcap, the market value of MakerDAO has risen steadily since January 2018, and has risen from more than 40 to about 20. Since February 2019, the market value has increased far more than the main circulation certificate, and the performance is excellent. MakerDAO Certified MKR has one of the reasons for the deflation property.

The pattern of the general market has basically taken shape. Compared with the direct competition with the head blockchain project, innovation based on the existing pattern is an easier “track”. The concept of BTC and blockchain is a decade of ups and downs. So far, the market value of the top 20 main circulation certificates represented by BTC has accounted for 88%-90% of the total market for a long time, and the ranking is relatively stable. The blockchain projects represented by these certificates are distributed in the fields of payment settlement, operation platform, banking services, wallet & transaction, stability and certificate services. Innovation based on the existing market structure can not only avoid direct competition with these head projects, but also enjoy the precipitation of native users, which is a "win-win" choice.

2 cooperation and win-win match over the two strong competition

2.1 Finance is the core of the modern economy

Finance refers to the value circulation across time and space and is the core of the modern economy. Narrowly defined finance refers to the financing of monetary funds. It is a bank-centered form of various forms of credit activities and the circulation of money organized on the basis of credit. Generalized finance is a three-dimensional system of vertical and horizontal cross, internal and external communication, multi-dimensional, multi-level, and is a huge system that combines and interacts with each other and interacts with each other.

Financial intermediation is an inevitable outcome of commodity economic and financial development. According to the People's Bank of China, the financial industry can be divided into four categories: monetary and financial services, capital market services, insurance, and other financial industries. The corresponding financial intermediaries can be divided into banks, securities companies, insurance company trust companies, etc., which are responsible for the needs of social economic development in currency issuance, payment, financing, investment, information trading and risk trading. With the gradual formation of commodity economy, currency and credit relations, financial intermediaries spontaneously emerged. In order to meet the social and economic needs of payment, the early financial institutions mainly relied on the deposit and exchange of money. After the financial financing became a high-frequency economic activity, both the supply and demand sides need to be provided with financing services by specialized institutions, and the financial intermediaries of deposits and loans–banks came into being. With the development of the economy, on the one hand, the government and enterprises have long-term capital needs, on the other hand, the accumulation of social money has gradually increased, and individual investment demand has been stimulated. After the popularity of credit relations, the variety of credit forms and the emergence of joint-stock companies, investment demand and technical service demand related to securities such as bonds and stocks emerged, resulting in investment-type financial intermediaries. The gradual expansion of the financial market has become more complicated and specialized. In order to reduce the integration of information and improve the efficiency and accuracy of decision-making, information-based financial intermediaries have begun to emerge. Along with the progress of the social economy, the awareness of risk prevention has gradually emerged, and security intermediary agencies have emerged as the times require.

2.2 DeFi and financial/financial intermediaries: complement each other and disadvantages

Compared with financial/financial intermediaries, DeFi has its own advantages and can complement each other to achieve a "win-win" situation. DeFi advocates non-differential but conditional (with conditions for asset requirements), and the adoption of blockchain technology ensures high transparency of transaction data, irreversible transactions and a certain degree of resistance to censorship. Financial and financial intermediaries have a long history and have a deep social base and a broad coverage of people (based on credit and risk control).

DeFi's indiscriminate but conditional access has the potential to further expand financial coverage. As far as the current development of the industry is concerned, DeFi's entry is in addition to the threshold of user education, and more importantly, DeFi's review of user assets (such as MakerDAO), that is, users can truly enter under the premise of possessing a certain amount of certificate assets. And use DeFi. Finance has evolved along with the development of human society, with a deep social foundation and a broad coverage of the population. There may be a high overlap between DeFi users based on Certified Assets and credit-based financial users, but in theory there are still DeFi users that have not been covered by traditional finance.

DeFi uses blockchain technology to increase transaction data transparency, ensure irreversible transactions and a certain degree of review resistance. DeFi has certain advantages in preventing malicious inflation of the main body of the regime. The blockchain technology has the characteristics of open source code, irreversible transaction behavior, transaction information that cannot be falsified, publicly queried, and traceable (transfer) traceability. Compared to the traditional financial industry, DeFi information transparency has increased significantly. The open source and decentralized mechanisms of source code have certain advantages in preventing malicious inflation of political entities.

In terms of user reach, both DeFi and finance have drawbacks of insufficient coverage. In addition, in view of the current development of the industry, DeFi is also facing the disadvantages of technical risks and landing applications. Although traditional finance has been produced for a long time and has penetrated into all aspects of social life, based on credit and risk control, there are still certain social groups that cannot enjoy financial services. DeFi is based on the user access of the Certified Assets, and most of the groups have been excluded at this stage. Technology risks and landing applications are risks to the entire blockchain industry, and DeFi is inevitable.

3 DeFi prospects: Hundreds of battles for thousands of sails

3.1 The number of DeFi projects is large, with the ETH public chain as the main position.

Since the creation of the DeFi concept, there are currently thousands of eligible blockchain projects. According to Github, DeFi can be divided into a diversified exchange agreement, a stable pass, a loan agreement, a derivative agreement/predictive market, and so on. According to the financial industry's division criteria, DeFi can be subdivided into: monetary banking services (such as issuing stable certificates), non-monetary banking services (such as loan agreements), securities financial services (such as classification exchange agreements, derivative agreements / forecasting markets). , bundled agreements, fund agreements), other financial services not included (such as tokenization protocols, KYC/AML/identity, applications/tools, analysis, others) . Obviously, at this stage, DeFi is mostly concentrated in the fields of issuing certificates, financing, transactions and related financial instruments.

The DeFi class projects deployed in the Ethereum public chain are the most numerous. On the one hand, the Ethereum public chain appeared earlier, and was the first public chain project to support smart contracts, becoming the first choice for developers of early DeFi projects. On the other hand, Brendan Forster, the creator of the DeFi concept, is the co-founder of Dharma Labs, and the project is also based on the Ethereum public chain development, as well as the most dazzling MakerDAO.

3.2 The Forerunner of “General Bank”: MakerDAO

The blockchain project MakerDAO has the functions of issuing stable certificates and mortgage financing. From the perspective of financial generation and historical process, it has initially possessed the prototype of “pass-through bank”.

MakerDAO can issue a stable pass DAI. The DAI is issued by a pass-through over-collateralized guarantee and is 1:1 anchored with the US dollar. It is by far the largest non-centralized stable certificate. MakerDAO operates on the ETH network. DAI is its internal stability certificate. There are two types of distribution methods: one is that users can use the smart contract of the Maker platform to create CDP (Collateralized Debt Positions) by pledgeing the held ETH certificate. , the mortgage debt warehouse), then the holder of the CDP account can generate a stable pass DAI within the amount of collateral support. The other is to use the OTCMaker digital trading platform to buy and sell DAI using French currency.

MakerDAO meets the financing needs of investors. In the traditional financial sector, due to the requirements of risk control, financial intermediaries such as banks have strict restrictions on SMEs and personal financing. One of the ways in which DAI is issued is to create CDP through mortgage ETH. In theory, as long as you have ETH, you can get a certain percentage of financing through MakerDAO to expand the income or hedge the risk. According to official data, as of the end of April 2019, more than 2.3 million ETHs have been locked into Maker's smart contracts, with a total supply of $83.07 million.

In the current financial system, banks occupy an important part, and may not only shoulder the heavy responsibility of issuing money according to national policies and economic operations (such as the Federal Reserve), but also participate in the regulation of macro and micro economy, build a social credit system, and supervise society. Functions such as economic performance. Compared with banks, MakerDAO's issuing mechanism has a single function, which is doubtful for the role of real society . MakerDAO is likely to expand its functional mechanism in the future.

MakerDAO has volatility risks and liquidity risks. In the MakerDAO system, one of the ways of generating DAI is the mortgage ETH. The current volatility of the market is large. The amplitude of 10% in the day is not uncommon. Therefore, in theory, the price of the certificate is greatly reduced, resulting in insufficient collateral. Cover the loan quota. Since MakerDAO currently only supports the pledge of ETH Pass, and since 2019, the ETH in the MakerDAO system has increased significantly, from 2 million in March and 2.3 million in April, which will affect the market of ETH in the long run. fluidity.

3.3 DeFi: The dominance of the "code world"

DeFi's blockchain technology is traceable, non-tamperable and highly transparent, and is a useful complement to the current financial industry. Later, with the maturity of DeFi and the iteration of blockchain technology, DeFi will play more and more important roles, and even the financial system that dominates the future "code world" is unknown. However, in terms of the current development of the industry, social needs, public chain performance and user education are all “blockers” on the road to DeFi development.

The pain point is still a pseudo-demand, and the exact conclusion cannot be made for the time being. Take the SZ and CIS transactions as an example: in the field of stability and certification, the recent fermentation of USDT events, the issuance of decentralized stable certificates will undoubtedly enhance investor confidence; in the field of compulsory trading, such as non-central The trading platform, no matter in the user base or performance, does not have the strength to challenge the centralized trading platform.

Public chain performance is one of the bottlenecks in development. At present, most DeFi projects are developed based on a few public chains. In terms of current technology iterations, most public chains do not support higher TPS, which will undoubtedly limit DeFi with higher transaction rate requirements. Deployment of class projects.

User education costs may be higher. Modern banks have been in production for more than 300 years, and there are still a large number of people who cannot use them freely. Blockchain and BTC production are only ten years old, and the rise of decentralized stable certificates and trading platforms is even later, and the time and cost of user education may be higher.

Although the above problems exist, the high probability is caused by the current development of the industry. At this stage of DeFi, if you want to get a lot of development, it is one of the feasible solutions to play the role of financial supplements rather than substitutes. The advantage of DeFi without access will help the financial industry to expand its service content and coverage, and diversify its service offerings with lower trust costs. The application of blockchain technology in the financial field will bring about relative security, trust, efficiency and a certain degree of business model reconstruction.

Note:

For some reasons, some of the nouns in this article are not very accurate, such as: pass, digital pass, digital currency, currency, token, Crowdsale, etc. If you have any questions, you can call us to discuss.

This article is original for the General Research Institute (ID: TokenRoll). Unauthorized reproduction is prohibited. Reprint, please reply to the background keywords [reproduced]

General Information Institute × FENBUSHI DIGITAL

Text: Song Shuangjie, CFA; Wang Xingang

Special Adviser: Shen Bo; Rin