Where is the development bottleneck of DeFi? What is the opportunity?

DeFi (Decentralized Finance) is a term that originated in the cryptocurrency native community and has formed a trend in the cryptogenous community that is incompatible with traditional centralized financial institutions. However, despite the high heat, the limited number of DeFi users has been a problem.

HashKey Capital, a blockchain investment fund, wrote a report, but gave some new perspectives from another perspective: DeFi's current development bottleneck is not affected by the performance of the blockchain. It should break through the bottleneck in three aspects: First, from the asset side From the perspective, digital assets should be applied in the real-built application scenarios, which will become the space for utility tokens. Second, from the perspective of technical architecture, the use of DeFi facilities will be improved, allowing real institutional investors to enter; The third is the financial perspective to improve the price mechanism of DeFi products, so that DeFi can really play the role of risk management.

Decentralized finance (DeFi) is becoming a hotspot in the encryption world. However, DeFi is favored by capital, but users are embarrassed. We believe that the blockchain performance is not an obstacle, but a variety of factors.

In our view, DeFi breaks through the bottleneck and achieves development. It requires three core elements:

  • Clear usage scenarios;
  • Clear price benchmarks;
  • Easy to use infrastructure.

DeFi functions require a clear usage scenario. The actual commercial application gave birth to financial needs, and DeFi was first required after the architecture. The DeFi infrastructure is relatively well-equipped to meet the needs of the scenario, and the core financial functions require a clear usage scenario.

A clear price benchmark will be the cornerstone of DeFi product pricing. A clear price benchmark has three fundamental roles for DeFi: to enhance the user experience; to control risk for the product; and to prepare for the chain of financial products.

In addition, financial core risk management and risk pricing require price benchmarks. Interest rate alliances, interest-bearing payment assets, and chain interest rates are expected to become three definitive mechanisms for decentralized interest rates.

Easy-to-use infrastructure is a necessary condition for an organization to enter the market. The low-frequency nature of the financial sector has led DeFi to do large-scale institutional needs. Five essential infrastructures: blockchain-friendly/digital asset-storage banks, digital asset custodians, digital asset-insurance institutions, decentralized liquidity instruments, and decentralized credit rating agencies will form the necessary conditions for institutional entry.

In the long run, DeFi will become an important part of open finance. Compared with the open bank of Financial Technology 2.0, the category of "Financial Technology 3.0" represented by open finance is even larger. The gradual decentralization of finance will move from fully centralized finance to financial facilities using blockchain technology to the final decentralized financial sector. With these elements in mind, DeFi is likely to become an important part of open finance in the future.

In response to our core views above, we have written the following reports, one by one for specific analysis and explanation.

Where are the core bottlenecks in the development of DeFi?

DeFi (Decentralized Finance) is one of the hottest topics on the market this year. Compared with the term “decentralized finance”, open finance may highlight the essence of DeFi: this is a market where everyone can participate as an asset and a liability. A network device and a certain digital asset are sufficient conditions for participating in DeFi without the need for identity review.

Capital is very positive in the direction of DeFi and is betting on the potential of the industry. As an investor, we can understand the industry's preferences and long-term perspective, to determine that this is a direction that can be achieved, and that the company is different from the blockchain, the product is directly oriented to the end user. So if the bet is successful, the future traffic will be able to perfectly replicate the success model of an Internet product. This may be the logic of the bets of the investment community.

However, DeFi has a high valuation and fewer users. The reality is that the number of DeFi users is now small. According to third-party statistics, all products currently add up to more than 10,000 users, which is still far from the volume of millions of wallet users. At present, the most popular MakerDao has more than 6,000 users, and the mortgage equivalent Ethereum is about 400 million US dollars. The total number of DeFi-backed digital assets is about 550 million US dollars. If you think of DeFi as a product, it is about the very early stage of an Internet product. MakerDao's valuation has reached $730 million (calculated in MKR) , and with the DeFi industry financing this year, the DeFi valuation across the Ethereum exceeds $1 billion.

We believe that blockchain performance issues are not an obstacle. We have noticed that there is a view that DeFi is not popular at present because the performance of the public chain is not good, but we believe that financial is a low frequency application besides trading. High-frequency applications must be addressed by centralized products such as exchanges. Therefore, the current status quo is not a problem of the performance of the public chain. If you go to the bank to do loans, do financing, go to the market to issue bonds, and do equity financing, you will find that it is much longer than the DeFi process, and the delay caused by the performance of the public chain. Not much compared to these times.

Exploring the core bottleneck: financial factors and blockchain mechanism factors

DeFi related products have been on the ground for more than a year. We believe that there are two major factors that restrict DeFi: 1 caused by financial mechanism; 2 due to the decentralized nature of blockchain.

Financial level: lack of scenarios and effective pricing

The first half of DeFi, "Decentralized," means open, no review, and anyone can participate. In the second half, the part about "Finance" was not highlighted.

It seems that DeFi is an open door, users can enter and exit freely, but now there is a threshold. A simple reality is that Internet users want to use DeFi, and the basic steps are more complicated than buying a digital exchange on an exchange account, and it is not easy to use. Of course, this is not the main problem to be discussed here. This article mainly wants to make a perspective switch. From the "Fi" part of DeFi, I will review the current status, shortcomings and supplements of DeFi.

In brief, Finance is actually solving a certain kind of capital demand problem (such as borrowing, investment, trading, arbitrage, and hedging) under certain circumstances. The emergence of this behavior requires two conditions: 1. Application scenario 2, reasonable pricing. The former is the cornerstone of the entire financial market, and the latter is a necessary condition for large-scale transactions. We believe that DeFi is currently missing in both areas.

Application scenario is not clear

For example, Alice needs funds to do one thing, Bob has idle funds, Bob lends idle funds to Alice, and Alice borrows things to do, such as opening a company, purchasing equipment, investing, spending, etc. The above is an example of finance in a simple legal currency scenario. What can be done by borrowing digital assets through DeFi? This is a problem. It is currently seen that there is no practical use except for the transaction arbitrage level. This is not a problem that DeFi can solve by itself. It is a universal problem. In the future application scenario, we believe that in the distributed business field, tokens will act as accounting units, and the demand for tokens will become the cornerstone of DeFi.

Pricing mechanism is opaque

The application scenario is well understood, that is, the emergence of a demand, which necessarily requires a supply to adapt. But there is another invisible aspect to consider, which is pricing. Since it is a service, it must cost, and the cost will affect the will of the participants. Measuring costs means relying on pricing. In the case of borrowing, Alice borrows Bob's funds. In addition to the principal, Alice has to pay Bob's interest. Pricing is equivalent to opportunity cost + risk compensation, opportunity cost is risk-free interest rate, and risk compensation is a measure of Alice's own qualifications. Appropriate risk compensation is a necessary condition for the success of the transaction.

If it is a borrowing in the real world, it is entirely possible that if the AB relationship is good, you can not pay interest. If there is maliciousness between the ABs, you may have to charge interest. If the AB does not know each other, how much interest should be paid? What happens on DeFi is that, because there is no need to enter, A and B are passers-by relationships, then how much interest does A have to give B? This is a pricing issue for financial products. If DeFi is getting bigger in the future, tens of millions of loans will happen, and countless Alice will think about this question, how much interest is reasonable.

In traditional finance, there will be financial intermediaries to solve this problem. In terms of deposits, banks will make their own decisions and will also refer to market interest rates. In terms of loans, banks will conduct credit analysis on enterprises, and the pricing of equity, bonds, and ABS will be carried out by specialized agencies. The current DeFi world is lacking.

Blockchain level: a variety of unresolved issues  

The relationship between products and users is not close

There is no access mechanism, as long as you register an account, you can use the product, and one person can register multiple accounts. Similar to Gmail, there are real users, except for the data analysis method is difficult to get the value behind the user, it is not as good as Facebook with the account system. Although the open bank has opened up the API, customers and data are still in their own hands, which is the largest intangible asset of financial institutions. And open finance is actually weakly associated with customers, and plug-in services make it difficult for DeFi to capture customer value. As mentioned before, the finance other than the transaction is not high frequency, and it is difficult for users to create value for the product through the flow, so the customer's own data is very valuable.

Currently only manage assets on the chain

DeFi is actually carried out on the chain, and the activities under the chain are basically not involved, so DeFi handles the assets on the chain. Once involved in the chain, it is necessary to deal with issues such as asset mapping, property rights, asset protection, etc. This is not something that DeFi can solve. DeFi needs more other mechanisms to assist, especially if you want to communicate under the chain and handle real assets. The industry has always had the desire to tokenized traditional assets, starting with a partial chain of assets and gradually looking for real financial needs, perhaps a means of expanding DeFi.

Potential crime problems can lead to industry risks

Also because there is no need to enter, the real user behind the account is difficult to locate. Who is responsible for the borrowed digital assets if they are used for illegal purposes? The process of doing AML like a financial institution is to prevent it from being related to criminal behavior. If AML is not done, it will touch the supervision. After the future prosperity of DeFi, the value of digital assets is reflected in the behavior of the reverse of crime is the need to find the subject of responsibility.

The three elements will be the cornerstone of DeFi development

Although we believe that DeFi has many factors restricting development, if we distinguish the primary and secondary, we believe that as long as there are three major factors that can be solved, the overall development direction of DeFi is not much, namely: 1. Clear usage scenarios; 2. Clear Land price benchmark; 3, easy to use infrastructure. We will discuss in detail in the following pages.

DeFi needs a clear usage scenario

The reason why finance arises is objectively caused by information asymmetry. In the supervisory perspective, financial institutions are responsible for credit and risk management. A central bank work paper proposed that the prototype of the bank was born in Florence, Italy. With the increase in the production capacity of handicrafts, the industry created a demand for finance, so the merchants set up a merchant bank to meet the goods and payment. Does not match. Merchant Bank is the predecessor of modern banks, with supply and demand configuration, price discovery, payment services and credit support.

Separation from the entity will bury the seeds of the crisis

The occurrence of finance is accompanied by real demand, and the back represents the actual needs of the business, such as advances, payments, matching, credit endorsement and other needs. In the later period of financial development, stocks, bonds and other products have emerged, making financial products not only have the above-mentioned traditional functions, but also have investment functions. The positive aspects are more market-oriented, such as financial product pricing, value discovery and fair value assessment, but also buried. The seeds of speculation. In the later period, when finance entered an excessive period of prosperity, financial products basically broke away from the real economy and entered the areas of serious speculation. For example, CDS, CDO and other derivative products cooperated with excessive speculation, which caused the financial crisis to erupt.

It can be seen that finance needs commercial support and business is also the cornerstone of finance. Moderate finance can activate resources, and excessive finance can make speculation flooding and bring disaster to the normal financial system. So DeFi needs a real usage scenario.


DeFi has an architecture first, then there is demand

The decentralized finance based on blockchain and digital assets, on the other hand, first imitates the generation of real-world financial instruments and returns to find specific needs. This will result in a seemingly complete financial foundation, but the demand does not appear. Of course, this is also inseparable from the fact that the pure chain is easy to do and the combination of the underlying chain is difficult to do.

The DeFi infrastructure is relatively complete and can meet the corresponding scenarios.

Financial intermediaries generally bear three major functions: payment, credit, and matching. These three functions are actually completely affordable for the blockchain. Bitcoin itself is a payment system, although it is biased towards value storage. The digital currency that was born after Bitcoin can be used for payment. Projects like Ripple and Stellar are cut into commercials with pure payment tools.

In terms of credit, the blockchain is de-credited. The role of financial intermediation gives way to cryptography algorithms. The blockchain architecture can guarantee that the data on the chain cannot be tampered with. The credit of the endorsement of large organizations is replaced by consensus. It is a new kind. Form of credit.

At the level of the coordination mechanism, the decentralized exchange has just started, and the transaction can be completed directly on the chain, indicating that the combination on the blockchain is feasible. Of course, larger scenes still need to be chained, especially when it comes to the exchange of digital assets and other assets (such as French currency).

DeFi's core financial functions require clear usage scenarios

For the three basic functions of finance, DeFi can be satisfied in terms of architecture, and the core of the financial industry is risk management. In fact, it has not entered the scope of decentralized finance. The risks here generally refer to maturity mismatch, credit risk, liquidity risk, market risk, operational risk and so on.

With the rapid and sufficient exchange of information, the role of solving information asymmetry has gradually declined, but it has also caused an excessive increase in information and data. Analyzing information, resolving information, and giving operational advice have become new demands in the financial industry. And these are not just the blockchain, but more of a combination of data and trust. Blockchain can play the role of no access, trust, and the combination of data is more important.

At present, the structure of decentralized finance is still incomplete. Mainly, the need for risk management remains unclear and the tools are not yet complete. The lending-type financial form needs to clearly identify the pain points of users, and the decentralized transaction has not lacked liquidity and price compensation mechanism.

Therefore, the current blockchain-based DeFi architecture can play a certain role in payment, credit and matching, but for core risk management, a clear application scenario is still needed.

We believe that the current application scenario is only a small part of DeFi in the future. The future distributed business will build the most real needs of Defi, and it also needs industry imagination and creativity. Distributed business is a bigger topic and will be covered in other reports.

Clear price benchmark is the cornerstone of DeFi product pricing

The price benchmark for financial products is the interest rate . Clear interest rate prices have three fundamental effects on DeFi: 1. Improve user experience; 2. Control risk for products; 3. Prepare for chain financial products.

Help users more users participate in decentralized finance. From the point of view of digital asset lenders, the current loan lending rate is indeed relatively low. For example, the interest rate on Dhrama is only 1%, which is lower than that of most staking platforms, which is difficult to attract. It is not that high is necessarily good, but there is no way to compare it. When the benchmark interest rate appears, the lender has a rough psychological expectation for the income, which increases the willingness to participate.

Help decentralize financial control risks. Taking MakerDao as an example, in order to maintain the stability of the currency price this year, the governance rate has risen from 1% to 19.5% in four months, which is unimaginable for the centralized system. Although it has increased revenue for the holders of Maker, it has undoubtedly increased the huge cost for Dai's borrowers, and actually does more harm than good for the overall product. Essentially, in the absence of a price benchmark, lending agreements need to overcompensate for uncertainty. And if there is a market-recognized benchmark interest rate, Dai's borrower does not have to bear this cost, which is more beneficial than stability.

Prepare for the chain of financial products. The chain of assets under the chain is already a hot topic, but the market only notices the trading attributes of the assets under the chain, while ignoring other attributes. For example, real estate is on the chain, how rent is reflected in the chain; bond on the chain, how interest is reflected; derivative chain, how to calculate the discount rate. In fact, as long as any income with time attributes will be linked to interest rates. Once the chain assets are on the chain and become part of DeFi, they need to pay the corresponding interest, which requires corresponding mechanisms in the chain. Excessive compensation and insufficient compensation will affect the use, and how to compensate, you need a price benchmark, that is, the risk-adjusted interest rate.

The core of finance is pricing by risk

Financial pricing is anchor-based and all financial products are based on anchors. It is therefore possible to first determine the anchor and continue to deploy around the anchor.

The price anchor of centralized finance works in this way: the central bank and the bank operate as counterparties. The various interest rates provided by the central bank set the basis of the market interest rate, and various interest rates are developed around this interest rate, forming various kinds of financial Pricing of the product. The bank then allocates balance sheets according to interest rates, and the adjustment of high and low interest rates affects the liquidity of the credit market and the money market. The conduction process is relatively clear, and various products are effectively (but not necessarily reasonable) priced according to different risks.

When it comes to DeFi, the difficulty is that there may not be a central bank to set up such an anchor, so the transmission mechanism will be difficult to develop. We discuss three possible mechanisms to form such an anchor later.

While the price mechanism for building DeFi seems complex, various lending products involve multiple digital assets, each with different characteristics, such as different consensus, governance, and inflation structures. It is difficult to start from a standard price to build the entire price system. But as long as you think about the situation of centralized finance, it is actually not much complicated. For example, various bonds, entrusted loans, mortgage loans, cash loans, etc., all products have their own circumstances, such as lender qualification (different regions, deadlines, cash flow status) , various requirements of the borrower, etc., in fact, the center In the world of financial finance, non-standardized products have far more patterns than current decentralized financial products. Since centralized finance can have a price benchmark, DeFi is also natural.

Price benchmarks help DeFi play a core risk management role

The FSB (Financial Stability Board) divides decentralized finance into three types:

  1. Decentralization of decision making. Refers to the role of making financial decisions from a single financial institution to a system user.
  2. Decentralization of record preservation. It means that financial institutions do not assume the responsibility of recording transactions, but by means of distributed ledger technology, ordinary users can access and verify the correctness of the books.
  3. Decentralization of risk taking. Refers to the flow or credit risk on the balance sheet, which is not borne by a single financial institution, but by a decentralized supplier under the decentralized market.

The nature of decentralization makes the risk exposure unclear. As mentioned above, the main role of financial institutions is risk management and risk pricing, in the process of earning excess profits. Decentralized finance, at present, does not have risk management capabilities. Of course, over-collateralization is also risk management, but it is relatively primitive. Users pay less than matching fees. In fact, users bear the risk of decentralization and Paid. Going to the center does not mean equality, and the entire system is paying for excess mortgages. Like the P2P website, the risk of default is borne by the platform, but completely decentralized or open, who will bear the risk of aggregation? The attribution of powers and responsibilities is currently very unclear. Therefore, it is necessary to evade risks from the attribution of powers and responsibilities. It is better to change ideas and start from price.

Clear pricing is a more efficient means. Therefore, clarifying the price of funds is a necessary means of risk management. Discrete market interest rates do not help to price risks. The ladder-like risk interest rate structure requires a price benchmark, that is, the base interest rate, which is derived from this base interest rate to form a complete set of risk pricing mechanisms.

Centralized interest rate mechanism determination mechanism

Interest rate alliance. In fact, the standard interest rate does not necessarily need to be formulated by the central bank. A credible alliance can also be used, such as Libor (although there have also been collusion risks) . The current lending platform on the market, if evolved to become a crypto bank, will make it easier to form a basis for interest rates. This is more advantageous than the alliance of the centralization organization, and it is possible to form a credible Libor-like interest rate by means of an open and transparent mechanism in the chain.

Payment assets with interest rates. Facebook 's Libra blockchain has clearly stated that interest will be paid, which comes from reserve assets on the Libra network.

When a strong credible currency pays interest, this means that the market's interest rates will emerge in an endless stream. The payment-type digital assets of various large institutions will add similar attributes, and finally become the market with the interest rate set by the large institutions as a reference.

Interest rate on the chain. From the perspective of the development trend of the public chain, the future big POS public chain will occupy the mainstream, including Ethereum/EOS/Polkadot/Cosmos, etc. Each public chain has a fixed inflation ratio, which can also be regarded as interest rate (because actually Interest rate policy also depends on inflation to adjust) . These are different from the chain interest rates of large companies like Facebook, which are native to blockchain assets and are also recognized by the blockchain community. Assuming that this situation, several major public chains will set the inflation rate to 0-5% in the future. In the case of limited resources, if the secondary public chain wants to attract nodes, it must set the reward high. At 5-10%, this is very similar to the interest rate credit structure of the current centralized finance.


The formation of pricing mechanism helps the DeFi market mature

After the interest rate credit structure is formed, the pricing of the DeFi platform is very clear, and comprehensive pricing can be formed according to the platform qualification, the number of users, and the endorsement of the organization. This is something that traditional finance can't do, because the data on the chain is open, and the risks are clear at a glance.

Of course, this is just the structure of credit, and there is no structure for the term. The term structure is not difficult to solve, it is nothing more than adding some time premium to the existing credit structure.

Easy-to-use infrastructure is a necessary condition for an organization to enter the market

The third element is the construction of infrastructure, especially for institutional investors. For traditional finance, more than 70% of the scenarios occur between institutions and institutions, and most of the finance is low-frequency applications. So DeFi will start with a personal customer, but still have to rely on the organization to do it on a large scale. Organizations are constrained by risk management and compliance requirements and are difficult to enter under the current architecture.

The necessary infrastructure will surely surface in the future. We believe that the following infrastructure will provide institutional investors with access to the world of digital assets and DeFi, namely banking, custody, insurance, decentralized liquidity tools, Centralized credit institution.

Blockchain friendly / digital asset storage bank

Banks have always been the most traditional institutions, with the most rigorous KYC, AML, compliance and internal control processes, and have always been more stringent for blockchain/digital asset service companies. At present, some banks with good banks, such as Signature and Silvergate, are also very scarce, so they have limited service capabilities, such as long account opening time.

In addition to the French currency bank, there are also a number of digital banks that claim to be able to provide digital asset services, such as Woorton, which provides legal currency digital currency conversion services in Europe, and ZooZbit Bank, which provides digital currency credit card payments in Israel, to provide digital assets. Tangem for banknote services, BlockBank for using the digital token to speed up the remittance process in the UK. In the United States, Wyoming Week also passed a bill in March to enter the scope of banking services as an asset.

Various institutions are experimenting with digitalization around the basic services of banks, which of course is decentralized. In the future, there may be a decentralized form of banks. If the bank's deposit and loan functions can be simply spliced, it may also become the prototype of a digital asset bank, but this is not enough. It may be that the multi-function digital asset bank will eventually mature after other infrastructures mature.

Digital asset custodian

Organizations can now use a variety of technologies to preserve their digital assets, but third-party services are needed to secure assets, which is traditionally accepted.

From the perspective of industry progress, digital asset custody has developed well both in terms of licenses and technology. The United States is at the forefront in this respect, and some states have issued digital asset licenses. There are many service providers doing digital asset custody in the market, but due to the lack of global services for licensing issues, there are also higher rate standards. I believe that the custodian will be more mature. The more well-known hosting institutions are: Coinbase, Bitgo, Fidelity, Primetrust, Xapo, Ledger, etc.

Digital Asset Insurance Agency

Relying on technical institutions to protect digital assets is necessary, but there is still the possibility of loss, so the coverage of insurance contracts is still a hard demand.

The insurance of digital assets is slightly different from the traditional insurance. We believe that there is not enough data in the pricing strategy to price insurance premiums. In addition, claims such as fixed losses require a relatively strong wallet, cryptography, and network. Security and digital currency understanding, especially at the technical level.

In fact, organizations have been exploring digital asset insurance. Since the end of 2013, Coinbase has introduced insurance contracts to cover the hot wallet of transaction search to prevent hacking losses. Encrypted Hosting Anchorage The company provides a fully insured solution for organizations and investors to store digital assets. The insurance is provided by Aon. Since 2018, some big-name insurance companies such as AIG, Allianz, Chubb, XL, etc. have also begun to increase insurance coverage.

In fact, insurance also has a distributed form, such as mutual insurance. Traditional insurance requires the participation of actuaries, pricing insurance products, requiring longer data discipline, estimating the probability of loss, etc., in accordance with the equilibrium premium pricing. In the case of decentralization, the actuary can provide services in the form of a marketplace, but the incentives in the middle need to be designed.


Decentralized mobility tool

The current decentralized lending has strong non-standard asset characteristics. However, there should be a standardization product that goes to the standard assets of the national debt, but in the decentralized world, there is no tool that can assume the role of national debt. This is because digital assets do not have real cash flow support, relying entirely on consensus. Caused by.

Decentralized liquidity tools have twofold roles: they become collateral and can be used for liquidity regulation. Because it is decentralized, it is distributed worldwide, it is achieved by consensus, and the credit level should be higher. When doing loan-based DeFi, you can establish a pledge mechanism, such as pledge rate, repayment period, and so on. Another role is to adjust market liquidity and adjust excess funds in the entire market through the purchase and sale of tools.

And the benefit of decentralization is that every institution and individual can express a preference for liquidity. Each node can express the requirement for liquidity, and this implementation method requires a kind of adjustment tool. Whether it is governance on the chain, governance under the chain, and implementation according to certain rules, decentralization is realized. The liquidity regulation mechanism.


Decentralized credit rating agency

If you are borrowing money, everyone is currently adopting a model of over-collateralization, which is equivalent to treating all borrowers equally. But in fact, the credit rating between individual individuals is not the same, so you should not pay the same cost. For example, the current 150% model of over-collateralization, the excess part has the opportunity cost, and how to reduce this cost requires rating agencies.

After the rise of distributed business in the future, the borrowing of tokens will inevitably generate demand, and the rating of helping organizations reduce costs will become demand.

Moreover, the decentralized rating is also more likely to gain market trust. The business model of the centralized rating agencies in the past is considered to have conflicts of interest. Decentralized rating agencies may have higher credit ratings if they adopt the data + community rating method directly. However, it is more difficult because it is difficult to position the network identity and the actual identity. A person can also have many accounts at the same time, so the negative penalty mechanism may be difficult to apply.

The infrastructure listed above is mostly centralized. We believe that although the market is decentralized, trust still needs to start from the center, especially when it comes to financial services. The traditional credit model still applies, so it is easier to make results. Decentralized infrastructure is more of an exploration behavior and more like a venture capital industry.

Looking to the future: DeFi will become an important part of open finance

Financial technology is widely affecting financial markets. The revolution in the market scenario of financial technology 1.0 is Internet finance. It is a category in which traditional financial institutions move application scenarios from offline to online and construct financial technology 1.0 through scenarios occurring on the Internet.

Financial Technology 2.0, represented by open banks, is in progress. The European Open Banking Policy is a bank that changes its product-centric tradition and is customer-centric. Through the open banking API, banks can pass their own payment, data, risk management and pricing. The general financial institutions can also use the bank API, application and their own business scenarios, which is the financial technology 2.0 scenario dominated by bank reform.

What is about to happen is Financial Technology 3.0, which is a restructuring of the financial infrastructure.

The reconstruction will be based on the blockchain-based financial infrastructure. The blockchain technology will enter the 3.0 phase represented by the cross-chain in 2019. The performance of the public chain will gradually mature and multiple high-performance. The public chain will go hand in hand.

Compared with the open bank of Financial Technology 2.0, the financial technology 3.0 represented by open finance is more important, and DeFi is an important part of open finance. The most important issue in the middle is to establish the practical application scenario of the blockchain, which is the first major factor we mentioned. The essence of finance is still to provide services. The shortage of services is a major problem. This is why there are so few DeFi users at present, because in addition to the idea of ​​asset appreciation, there is no scenario where finance can work.

The gradual decentralization of finance will move from fully centralized finance to financial facilities using blockchain technology, and finally to fully decentralized finance. The second phase focuses on the current problems of centralized finance. For example, the inefficiency of the remittance system, the weak coverage of long-tail customers, and the high cost of settlement of transactions, there will be a large number of financial enterprises to try. From an industry perspective, financial companies are very active in trying blockchain technology, especially in the areas of cross-border remittances, supply chain finance, etc., using alliance chains and licensed blockchain technologies. Therefore, the completely decentralized financial form and the competition with the second stage are the future considerations.

The perfection of future DeFi requires the three elements we mentioned. First, from the perspective of the asset side, the digital assets should be applied in the real-built application scenario, which will become the space for the utility token. The second is to improve the use of DeFi's facilities from the perspective of technical architecture, so that real institutional investors can enter. The third is the financial perspective, perfecting the price mechanism of DeFi products, so that DeFi can really play the role of risk management.

At present, a large number of large companies with real business scenarios are beginning to use blockchain to build applications, such as Facebook's C-side model Libra, JPMorgan's B-end model JPM Coin. Whether these applications can interface with DeFi in the future or they themselves will be part of DeFi. This makes the application scenario based on the blockchain 3.0 public chain more inclusive. With these elements in place, DeFi is likely to become a real boom in the future.

Written by: HashKey Capital Research Team

Source: Chain smell