In the past year, DeFi Eco has begun to take shape in Ethereum, and has produced thousands of applications around stable currency, lending, derivatives, decentralized exchanges and other businesses. What are the financial shocks and technical challenges that DeFi, which is considered to be the new financial technology revolution, will bring? Looking at the current status and future direction of DeFi ecology, where will it go?
On June 13th, the first phase of Babit's community interactive interview column, She Knows, revolved around "DeFi, what is the new financial technology?" The theme, two online interviews were held: "Technology Innovation, Searching for Industry Waves" and "Chain Finance, Interpreting Investment Passwords".
In the second half, we invited Pan Chao, the head of MakerDAO China Community, He Bin, founder and CEO of imToken, and Gu Yanxi and the Entity Research Institute of Encrypted Digital Assets to interpret DeFi from an economic and financial perspective. The interview was conducted by Babbitt 8 and asked the moderator Jia Xiaobe.
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There are many wonderful stories to share with you:
Pan Chao: Formulating an economy's monetary policy is much more difficult than driving a high-speed car in intricate terrain. Even with the most advanced autonomous driving system, police and protective personnel are required to participate in the machine when they are stupid. .
He Bin: The most important thing is that building DeFi should make it become the inclusive finance we often say. Serving those "unbanked" underdeveloped areas and people, it is not important to change the life of Wall Street. Everything has its own self-limited period.
Coin Research Institute: In the traditional financial world, we expect that the key pricing mechanisms such as insurance, asset management and even LIBOR will undergo major reforms based on blockchain technology in the next 10 years.
Gu Yanxi: For the application promotion of DeFi, it must involve existing currency and various assets, and these currencies and assets are under supervision. Therefore, if the DeFi project is to be promoted and expanded, it must be compliant. Here's the most comprehensive content that the She Knows community has shared.
Question 1: Before the official interview begins, I would like to ask a few guests, which applications have you used DeFi? Is it an experiencer or a user? What products do you need to solve your needs? What is the feeling during use? What are your reasons for optimistic about DeFi?
He Bin: I am an early user of DeFi . I have tried many applications. I like it most. It is also the most easy for ordinary users to get Dai and Compound. The reason is simple: USD > ETH > DAI > Compound 10% annualized interest rate.
Pan Chao: I am a heavy user of DeFi. From MakerDAO pledge ETH to Dai, to Compound, dYdX decentralized leverage trading, and various forecasting markets, almost all DeFi related to Dai have played.
For people new to blockchain products, there is a certain threshold for using Dapp. You need to download an imToken wallet or Metamask browser plugin to sign up for an account, manage private keys and interact with the app.
However, as long as the first step is completed, the advantages of the Ethereum account system are reflected. All DeFi do not need to register new users, and can be seamlessly switched. This is a killer for financial applications, and arbitrage between different markets. Liquidation is real-time. This means a pool shared by stakeholders, and risk taking is the source of liquidity.
Many people think that the decentralization application is slow. I don't realize that if the usage scenario is not limited to the speculation itself, the decentralized application (exchange) is the fastest, only one block confirmation is needed. This is the centralized exchange. -50 times. The gap between the decentralized exchange and the centralized exchange is now mainly due to the first-mover advantage of the centralized exchange, and in the future, the prospect of decentralized exchanges is very large.
Coin Research Institute: Some members of our team are actively using DeFi products. To say what we can solve, there may be two: one is to earn interest returns on our personal long-held crypto assets (if we lend capital); the second is to test these DeFi applications, get A more comprehensive understanding of the industry.
Currently, platforms like Compound, dydx or Nuo Network can meet the following requirements: Easily create loans, increase capital usage, and have greater transparency (of course…a big difference between platforms).
From a UI perspective, most Defi applications are quite user friendly (if compared to other dApps, such as Augur). But for users who use them for the first time, it may be a bit daunting. Existing DeFi users are accustomed to often transferring funds in their wallets. However, the vast majority of participants in the world of crypto assets remain “quiet” on the blockchain because they hold money on centralized exchanges and almost never transfer funds from one wallet to another.
Recently, we conducted a survey of large organizations and VIP customers and found that only 10% of customers have used any form of dApp. It can be seen that at least people are not currently adapting to chain interaction and management funds, but if the platform continues to improve the user experience, the world of DeFi will become more popular, although this will not happen overnight, but in the medium term, it has tremendous growth. potential.
Gu Yanxi: I am specializing in research, sharing the reasons for optimistic about DeFi. I think DeFi-related blockchain technology and encrypted digital assets will overturn the current securities industry and the banking industry. Because one of the most basic foundations of these two industries is liquidation. Distributed clearing replaces existing centralized operations. Therefore, all the institutions, functions and business processes of these two industries will be subverted. Question 2: Our theme today is DeFi “Decentralized Finance”. This term is commonly used by everyone, but I know that many teachers do not recognize this statement. For example, Mr. Pan Chao believes that the better expression is “open.” Finance, Mr. Gu believes that “decentralized finance” and DeFi are two different things. Can you briefly explain your views on the concept itself? What are we going to discuss?
Gu Yanxi: I think the word DeFi is quite good. Its meaning should include decentralization and de-intermediation, as well as weak centralization and weak mediation. I think that a variety of distributed applications will be widely used in the banking and securities industries. Such as distributed clearing, mortgage lending, stable currency issuance, decentralized exchanges, and so on. There is only one point, pure decentralized applications that are difficult to apply in a compliant financial market and are promoted.
Pan Chao: DeFi is based on assets in the blockchain. Through automated contracts, there is no need for third party hosting and auditing. Without identity discrimination, anyone can participate in a financial system. What we want to discuss is the openness and transparency of finance, not the decentralization itself.
He Bin: DeFi My understanding is that there is no need for a licensed and trustworthy open financial service. In fact, there is no need to entangle the noun terms too much. The core points are:
– Permissionless means that anyone can participate with zero threshold – Trustless means no need to trust third parties, deal directly with machines, code
Most importantly, the creation of DeFi should make it become the inclusive finance we often say. Serving those "unbanked" underdeveloped regions and people, it is not important to change the life of Wall Street. Everything has its own self-limited period.
Coin Security Institute: In our latest report, to define the scope of the discussion, a definition of DeFi is: “An ecosystem of applications built on blockchains, point-to-point protocols and decentralized networks that do not require permission. Used to facilitate lending or financial transactions."
We believe that the concept of “open finance” is larger than “decentralized finance”, the former includes the latter.
"Open finance" can include a centralized system, a distributed system, a blockchain platform, or a non-blockchain platform. In short, it can represent any concept/application that contributes to new financial practices in which peer-to-peer (P2P) is a necessary condition, with no third-party trust intermediary (and a commission for this).
If the definition of DeFi is narrowly defined, we think it refers to the decentralized platform/protocol. The core feature is that there is no asset three-party hosting, and it is replaced by smart-contract. Question 3: DeFi automates the implementation of some traditional financial products through smart contracts, making them decentralized. As a new financial test field, will it replace traditional finance in the future? What traditional financial products are suitable for innovation with DeFi? And the disadvantages and inherent risks of DeFi?
Gu Yanxi: I think the biggest value of DeFi is decentralization and de-intermediation. It allows both parties to trade directly, thus improving transaction efficiency, reducing transaction costs, ensuring the ultimateity of transactions and increasing the use of trading funds. I think the most appropriate comparison should be to compare it with a centralized financial model. The traditional financial transaction model is based on a centralized trading model. So in this sense, it will replace the traditional financial transaction model.
In fact, whether in the securities industry or the banking industry, DeFi will fundamentally change the existing financial transaction model. For example, in the securities industry, there are distributed liquidation, decentralized transactions and margin financing. In the banking industry, there are stable currencies, distributed clearing and mortgages generated on a distributed basis. In the current financial market, these functions performed in a centralized manner will be replaced by DeFi. So the current organization that performs these functions will also change a lot. For example, there is no need for a liquidation company.
The biggest flaw in DeFi is its support for anonymous users. In real financial activities, regulation is unlikely to allow financial transactions between anonymous users. All assets and funds are under supervision, so if DeFi needs to be widely used, it must support transactions between real-name users. Otherwise, it will be limited to a small scale of digital assets.
The Institute of Credit Research: In the short term, it will not replace traditional finance. In the long run, both will penetrate each other. We now see the blockchain's native application want to grab the traditional financial cake, and the traditional financial industry is also trying to use the blockchain to transform some links (although more on the Permissioned Blockchain), both sides The genes are not the same.
For example, innovative products like Quorum from JPMorgan are forked from Ethereum, and the contract is written in the Solidity language just like Ethereum.
In the long run, the two "worlds" are expected to get together, or at least the boundaries between the two "worlds" should become permeable.
For products in the traditional financial world, we expect that key pricing mechanisms such as insurance, asset management and even LIBOR will undergo major reforms based on blockchain technology in the next 10 years.
Observing the existing DeFi ecosystem running on Ethereum, the main problems include the lack of insurance mechanisms, the difficulty of redeeming legal tenders (which may limit the growth of the number of participants) and the need to over-mortgage, which is not conducive to “unopened” users. (ie users without encrypted assets) receive funding/financial services.
As more and more access points for cryptocurrencies and digital assets become available, more individuals will be able to arbitrage between any price and return, such as interest rates in DeFi systems and large gaps in interest rates in traditional banking systems. Even the equipment items in the game can be arbitrage.
When it comes to risk, in fact, it is better to divide the classes first. We think there are three types: 1. The general risks specific to the blockchain, such as network congestion, uncertain transaction costs on the chain, etc. 2. The risks of the specific platform, For example, smart contract design flaws, excessive concentration of interest rate governance (such as Dharma), or predictive machine failure (for example, how to feed data into smart contracts). 3. Regulatory risks, such as the uncertainty of licenses, taxes, and securities classifications. Question 4: Observing the current DeFi ecology, there is actually a two-day trend of ice and fire. The fire refers to the DeFi ecosystem, which has thousands of applications, including stable currency, borrowing, decentralized exchanges and many other forms. Ice means that the amount of funds is very small, basically the stock market, and the lending business accounts for 90% of the total. Why is this contradiction caused? What is the core scene of decentralized finance? What hinders its real outbreak?
Pan Chao: This phenomenon is because we are still in the early stages of DeFi. From decentralized exchanges to stable currencies to lending, it can actually be seen as a process from the exchange of goods to the general trading medium to the formation of the money market.
The current DeFi is a prototype of the money market on the blockchain, and the volume is not mainly due to the asset side. Except for Ethereum, few assets have strong decentralization and high liquidity. Bitcoin is one, but there is no mature cross-chain asset transfer and contract cross-chain solution.
For decentralized finance to be adopted on a large scale, it is necessary to enrich the assets, and it is inevitable that the assets of the "real world" will be chained, such as gold, bonds and stocks. To a certain extent, this depends on traditional authorities, but it must take a step. That's why I think DeFi's better direction should be open finance, not limited to decentralization itself. Because decentralization is divided into degrees, and it is easy to fall into the ideological battle.
He Bin: DeFi itself has just begun. It starts with the DEX decentralized transaction agreement, and then stabilizes the currency. Immediately after the loan agreement, more financial derivatives agreements are on the way… It is indeed a bit of a phenomenon. However, no phenomena-level products have been seen yet. TLV (Total Locked Value) should be almost $1 billion, and trading volume and liquidity are still very limited.
Why is this? I personally feel that the turning point comes from the "incidental incident". The real innovator is doing things silently. The water is not very moving. Once the opportunity comes, it will be overwhelming.
We are doing wallets, thinking about what role we should play. When we write the blockchain for ten years, we want to make it clear that the wallet is the interactive interface for users to access the blockchain network. DeFi is a service that runs in the network. We want What you do is to connect these services more securely, friendlyly and seamlessly. The threshold is low enough, and the outbreak will happen in an instant, such as "Yu Bao Bao to Alipay" and "Red Packet to WeChat".
Coin Research Institute: I think one is the threshold of the blockchain world itself. How to open a wallet and buy coins is not easy. The second is the contradiction between anonymity and credit lending, which leads to the current borrowing of only the excess mortgage model. But these problems are not unsolvable. For example, after the personal real credit record is on the chain, whether it can be real-name credit lending, so that no over-collateralization is required, and the platform model at that time may not be the DeFi we see under the narrow definition. Question 5: The Coin Research Institute team recently issued a report "DeFi Series 1: Decentralized Cryptoasset Lending & Borrowing", which is about the loan business in the DeFi ecosystem. Because it is in English, I think some friends in the community may Haven't seen it yet, so please ask the friends of the Institute of Credit Research to summarize the key conclusions of the report, including the user portraits of the market participants? What is the motivation for their participation? What are the advantages of these lending products compared to centralized financial platforms?
Coin Security Research Institute: Compared with traditional financial products, decentralized unmanaged agreements offer several promising advantages, such as: 1. Higher pricing efficiency, because the emergence of these platforms can improve the imbalance between supply and demand in the market. 2. The availability and speed of borrowing capital and transparency; 3. Resistance to censorship and immutability.
However, given the experimental nature of such financial products, they do exhibit specific shortcomings for managed products, including: 1. Technology risks (reduced counterparty risk, but smart contract risk increases); 2. Low liquidity (ie, It is difficult to borrow on a large scale without affecting the current interest rate level).
When it comes to user motivation, the DeFi application/protocol gives market participants different motivations, such as borrowing, shorting or leveraging to make more assets or borrowing rights (such as governance); for lenders You can use your own assets to earn interest; for both, there is a cross-platform arbitrage opportunity. Question 6: What is the loan platform model on DeFi now? What are the problems with over-collateralization? In the past year, what is the trend of betting on assets in DeFi? And analyze the reasons behind it?
Coin Research Institute: As everyone knows, Maker is currently the largest lending platform, and nearly 80% of the total DeFi ecological assets in Ethereum are locked in Maker. Other large platforms are Compound, Dharma, Nuo Network. It is worth mentioning that Fulcrum's momentum has recently been strong.
Since January 2018, the upward trend of the DeFi lending market has become obvious. More collateral has been locked in, more lending agreements have been signed, and new platforms have emerged. However, the imbalance between lenders and borrowers seems to be more and more obvious, because the demand for lending is greater than the demand for borrowing on the decentralized platform.
There are two main problems with over-collateralization:
First, in the current form, these platforms cannot help people without encrypted assets. Since there is currently no credit score available, the loan must be over-collateralized, which, by design, reduces the chances of users reaching capital. Therefore, these lending platforms will not expand the base currency amount as in real financial institutions, as one of the prerequisites for signing a loan contract is over-collateralization (often as high as 150%). Another system based on credit scoring is also under development, but it is not clear how to design such a blockchain lending system without a clear KYC policy, but it is possible to further “discriminate” some market participants.
Second, it is impossible to conduct highly leveraged transactions. Although it is possible to borrow and transfer these funds to other platforms, it is still unfortunate for traders to borrow on decentralized platforms and agreements because traders need to over-collateralize. Centralized exchanges make margin trading easier because they rely on a centralized automatic de-leverage system, complex clearing algorithms and guarantees that allow traders to establish highly leveraged positions.
Pan Chao: I agree that the chain trade said that the chain trading is not suitable for high leverage, but the margin trading can be decentralized. You can look at the latest products of dYdX. Question 7: Teacher Pan Chao compared MakerDao to the “central bank” of the current DeFi ecosystem. Perhaps because Maker is one of the most famous DeFi apps available today, it can issue "stablecoin" (stable coin). But as a central bank, setting "interest rates" (or Dai's stability fee) is a core task. From the history of modern central banks, elites and specific formula/quantity target governance cannot adapt or often lag behind real market conditions. So what do you think of the future ideal DeFi "Central Bank" monetary policy?
Pan Chao: For a long time, monetary policy has been a trade-off between established rules and Rules vs Discretion.
Rules such as algorithmic rules can limit the power of currency issuers and cognitive biases, while discretion can be more flexible in responding to changes in demand and emergency assistance in the event of unforeseen black swan events.
The ideal DeFi monetary policy can have more complete data and models to help developers set better risk parameters, but it does not eliminate human involvement.
I have cited the example of making an economy's monetary policy much more difficult than driving a high-speed car in intricate terrain. Even with the most advanced autonomous driving system, police and protective personnel are required to be silly in the machine. Human participation. Question 8: Where is the user's maximum threshold for using DeFi now? Xiaobai or ordinary users, how to participate in DeFi?
Pan Chao: First, I have not heard of it. Second, I don’t know how to use it. For the small white user, the most direct way to participate is to exchange some Dai in the imToken and save it to Compound. You can lie down and earn about 10% of the annual interest, and you already have the basics of using most of the DeFi applications.
Question 9: As a “giant” in the DeFi ecosystem, although Dai is a decentralized stable currency, the governance of MakerDao seems to be less transparent, and everyone has always had many questions about the voting for stability fees. I would like to ask Pan Chao how to look at the "chain governance" problem? We see that tezos, Polkadot, and nebulae all have governance in the promotion chain. Will MakerDao adopt the chain management method in the future?
Pan Chao: The governance of MakerDAO is actually transparent enough. Every time the Policy Adjustment Maker publishes results in various channels, and from the characteristics of Ethereum, all voting distribution records are transparent in the blockchain. We also discuss policy effects and next steps at the weekly video governance conference, and anyone can participate.
For chain governance, I think that at least for the time being, chain governance cannot exist independently, and it must be a combination of chain and chain governance. In addition, not all decisions need to be placed on the chain, determined by the votes of shareholders.
In addition to potential economic attacks and conflicts of interest, token holders are not necessarily the ones with the most comprehensive and knowledgeable knowledge of specific events. The goal of governance is to make decisions that are most professional and most concerned about the long-term interests of the system, and voting on the chain is an information gathering process.
For example, who is the CEO or CTO of the project may be the clearest of the project itself, and the chain management is the most efficient at this time. For events that require feedback from market participants, such as Dai's stable rate adjustment, it is a process of continuously collecting market signals and finding the best balance point through trial and error and correction.
At present, it is also very effective for MakerDAO to choose to adopt chain management in this part. In the future, when the infrastructure is perfect, especially after the identity system is established, Maker's governance will gradually move toward a complete DAO. Question 10: Why does imToken want to do dex (Tokenlon)? What is the difference between Tokenlon and common dex? How to solve the price and speed compared to the centralized exchange?
He Bin: First of all, we have planned to make a transaction since the first day of doing imToken. Because the user saves the currency in the decentralized wallet, why move to the centralized database to trade? The first one is very frictional. The second is non-atomic trading. Users need complicated operations. When we see Ethereum's continuous improvement in the DEX agreement, we started decentralized exchanges in April last year. Tokenlon, the first to adopt the Kyber and 0x protocols, supports two modes, flash and traditional order mode.
After running for a while, we found that wallet users prefer the flash mode, but users will feel that Kyber's exchange rate is not so good, and the existing DEX also has various problems, so imToken began to build a new version of Tokenlon.
Different from common dex: Unlike DEX like Uniswap or Kyber, the transaction price is calculated on the chain, and the number of transactions cannot be determined before the winding. Tokenlon's quote is WYSIWYG, and the quantity at the time of signing is the final transaction quantity.
As for how to solve the price and speed problem? The Tokenlon back-end server provides an efficient price aggregation service. When a user asks for a quote, the Tokenlon server will interrogate all market makers; the price (order) returned by multiple market makers will be aggregated at the Tokenlon server; The optimal order after aggregation will return to the user. Guarantee users get the best price in the fastest time. Question 11: Sharing the imToken Thinking about DeFi, how can you help users lower the usage threshold?
He Bin: I have been thinking about this issue recently . I have been looking at other people's projects and connecting to third-party DeFi services. With some of our own ideas, we will try to do some DeFi with minimal thinking, and do some practice in our small user base, mainly to reduce the threshold and popularization concept, so stay tuned. Another thing that you and I can easily do is to buy a bottle of beer with the imToken payment DAI.
Question 12: Mr. Gu has a very rich experience in the traditional financial industry. From your perspective, what should DeFi's future business model be like? Will the largest scale application always be a loan? What do you think about paying this piece?
Gu Yanxi: Borrowing is definitely one of the biggest applications, but I think the most influential one should be liquidation, because this is the basis of all financial business. I think the payment business is realized at the end. This is because the payment business is The place with the strongest financial power, in other words, it is difficult to make a profit in this field.
However, the current distributed lending method is still very limited, because it is only limited to the field of digital assets, and has not yet achieved the opening of the same legal currency. In order to get through with the legal currency, it must be under the premise of compliance, so as to reach the real currency and win the cooperation with the financial institutions in compliance.
I think cross-border transfers between different laws will be a major area of application. It must be based on a stable currency and a low-level distributed clearing system. This area is also the area where Facebook stability will be the first to focus.
I think Facebook's stability will necessarily include a stable currency generation mechanism and a low-level clearing settlement network. If Facebook's stable currency will be the same as other US stable currencies, the ERC20 approach will be very surprising.
In fact, the underlying clearing network of Facebook's stable currency will have more value than his stable currency. Because it can support financial products that are more complex than stable coins. So this distributed clearing network will truly become the global financial infrastructure. At least I hope that will be the case. But how to wait until June 18, Facebook announced his stable currency plan. Question 13: Does Facebook launch a stable currency that will have a big impact on XRP? How do you see the stable currency launched by Facebook?
Gu Yanxi: The market for stable coins is too big. Therefore, it will be able to accommodate multiple stable operations. So I don't think it will be great for direct impact. And Facebook's stability must be the first to focus on India's cross-border remittance market. It does not compete directly with other stable b business applications.
Coin Security Institute: The moat before Facebook is social media. It is very similar to China's WeChat. It can be simply understood that Facebook coin is the number in WeChat payment, which is not universal in different jurisdictions. Although it is difficult to predict what the final structure of Facebook is, the blockchain is likely to be private (or partially private) and has some degree of authority in Facebook itself. Similar to JPM Coin, the project could be a stepping stone for large-scale adoption of cryptocurrencies and other digital assets, while helping to pay for the “financial disintermediation” of the industry, which is generally a simple matter. Question 14: Mr. Gu had previously published an article in the Babbitt column on the compliance of DeFi. The discussion on this topic is actually not too much, because everyone will think that since decentralization, there is no such thing as being The main body of supervision, why do DeFi products have compliance and regulatory issues?
Gu Yanxi: DeFi application compliance, which is not only the requirements of national supervision, but also the application of DeFi itself.
For financial supervision, his primary responsibility is to ensure fairness in the market and the interests of investors. If financial transactions are not regulated, then these transactions are likely to undermine the fairness and stability of financial markets, as well as the interests of other traders. These are the first goals that regulators must guarantee. Therefore, the regulator will definitely need to know the true identity of the trader. At the same time, it can also monitor the operation of financial markets to ensure the stability and fairness of financial markets.
For the application promotion of DeFi, if it is to be large, it must involve existing currency and various assets. These currencies and assets are under supervision and under the control of regulated financial institutions. If the DeFi application is not compliant, then you won't be able to reach these currencies and assets, and you won't get access to these financial institutions. It can only be limited to a small market of pure digital assets. Therefore, if the DeFi project is to be promoted and expanded, it must be compliant.