DeFi Finance is the future: starting with borrowing, but not just borrowing

First, flash collapse

Yesterday morning, the entire digital currency market showed a flash collapse. In just a few hours, Bitcoin fell from more than 9,000 US dollars to a minimum of more than 7,000 US dollars, a decline of more than 2,000 US dollars, a drop of nearly 20%, many digital currencies The decline even exceeded 50%.

This is unthinkable in the traditional financial world. This situation usually only occurs when the financial crisis breaks out, and it is the kind of financial crisis of the depression level, and Bitcoin together with the entire digital currency. The world has also been a hot search for social news because of this news.

In fact, this flash crash is not the first occurrence of Bitcoin and other digital currencies. In the development of the cryptocurrency, there have been several flash crashes. In my impression, the single-currency decline of more than 30% in a single currency has occurred at least three times. If it happens that the incident is a black swan event, then it can not be called a black swan 3 to 5 times. It should be called normal, and we need to treat it seriously .

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Second, leverage, futures and contracts

I have read a statement from a big V, saying that this decline was caused by the continuous opening of the domestic contract. The source of the altcoin driven by the irrational premium after the new quarter was launched has no reason to rise, and no new funds are allowed to enter the market. In the case, it can only end in decline.

Some people added that it is necessary to look at the quarterly market of a large exchange. In the early morning, it was found that the spot price of the exchange's BTC spot and another mainstream exchange reached $500.

Is this interpretation the truth? Maybe, maybe not. But in any case, leverage and contracts have had a very bad impact on the volatility of this digital currency market, which no one denies.

When someone was at 3 or 4 in the middle of the night, I received a text message reminder that I was about to explode, so I immediately logged into the exchange and wanted to add a deposit and found that the exchange could not be logged in. Some people want to buy USDT to make up the position after switching on the exchange. Sorry, the merchant is not online, the merchant goes home to sleep, and in the end, you can only watch your position being exploded.

If the ordinary digital currency follows 20% of Bitcoin, it is barely within the normal range, but many of the mainstream currencies have fallen by more than 50%, which is definitely not normal. In this case, there is basically only one possibility, that is, the sharp drop in the market has caused a large number of leveraged positions to be exploded, and the positions that were exploded were forced to sell, causing further price declines, especially at 3-4 pm. Not much, so a stampede occurred at one time.

If the website is not logged in, this is only a trivial matter. After all, there are always a few websites that can be logged in. The really terrible thing is to stop the position.

The fixed point of the warehouse means that the other party can master your position, your opening price, the opening price, etc., and he not only knows your position, but knows the position of the vast majority of people in the market, he knows The overall price of the market is probably concentrated. When they accurately grasp your spot, they can use their own funds and strength to stop the position.

This looks like the same thing in the novel, but it is real in the digital currency world. The entire digital currency market is not large, and tens of millions of funds can already affect this market, and this is actually the reason why major mainstream institutions have been slow to pass the Bitcoin ETF and Bitcoin futures.

If other bookmakers make a fixed position on your position, it is not so horrible. The most horrible thing is that the exchange itself will make a fixed position for you. The exchange is able to master all your data. He knows which point is the most important. If it falls below this point, the market will start to panic and the market will plummet. And it also has a variety of means outside the disk, such as the "dial cable" that we usually joked, so that the website can not log in, pin, so that the service of the business is damaged, etc., so that you can not replenish the deposit in time, thus breaking the position .

There is no direct evidence that the exchange is involved in such things, but there is such a possibility, and in the face of huge interests, we must be vigilant about this behavior.

Third, the derivatives of the currency, most of them have no practical significance?

The situation we mentioned above is only the reflection that yesterday’s plunge brought us. But in fact, this issue needs to be considered at a higher level. In the digital currency world, more and more exchanges provide leverage services, more and more exchanges provide contract services, and leverage is not simple. 3 times and 5 times of the single, most of them provide 10 times, 20 times, 100 times the leverage. In addition to leverage and contracts, there are a lot of new financial derivatives, such as options, such as futures ETFs, and a variety of financial derivatives that we have never heard of.

Do you remember how the 2008 financial crisis broke out? The culprit is a series of financial derivatives based on subordinated debt. In my opinion, the financial derivatives of the currency circle make the risk of the entire currency circle gather in large numbers. Sooner or later, there will be an event similar to the 2008 financial crisis. The first two days of the plunge is only a preview of this crisis, but only A small-scale outbreak of risk .

Moreover, even if there is a plunge, everyone simply sighs that the fluctuation of the digital currency is large, and does not directly point out the real risks behind this, nor does it point to the real problems in this industry. It can be expected that in the process of the next market recovery, the collapse will be forgotten, and then the financial derivatives of the currency will be more and more, and the risk will continue to accumulate, leading to the next bigger risk explosion.

If in the traditional financial world, some financial derivatives still have a certain role, then the financial derivatives of most of the currency circles are meaningless to me .

For example, in the traditional financial world, futures are also regarded as a kind of financial derivatives, but also leverage, but futures have a certain meaning, it can effectively hedge the risk of price fluctuations in the real economy, achieve hedging, and then own The function of price discovery.

However, in the currency circle, it can be said that no business is truly grounded. That is to say, most of the coins are backed by no physical assets. Since there are no physical assets to support, there is no physical risk to hedge. What else does the future need to do? If bitcoin is used as the currency in the world of digital currency, and the risk of exchange rate fluctuations needs to be hedged, then other digital currencies, their leverage and contracts do not play any risk aversion, purely to increase leverage, amplify risks, Enhance speculative attributes.

At this time, we really need to think about it. Are the digital currency world really needed for the leverage, futures, contracts, and even 100 times leveraged contracts, options, and so on? What is the true meaning of these things? Where is the value of real life?

Fourth, Defi Finance

Since I have talked about it here, I also mention DeFi Finance. DeFi Finance is the hottest word in the blockchain industry since 2019. There is a saying that ICO is only the tip of the iceberg of virtual finance. DeFi is the iceberg itself, and it is the place where the blockchain is really valuable to the financial industry.

This view is recognized by myself. However, as far as the development status quo is concerned, the so-called DeFi finance is basically an automated mortgage loan, and there are not many other new things.

Compared with traditional lending, this kind of DeFi finance simply realizes the automation of traditional lending. The original loan repayment requires manual review and manual operation. After borrowing, the lender must pay close attention to the risk and keep staring at the price. But now directly using smart contracts, they can be automatically executed and enforced, which reduces the moral hazard during the repayment phase, which reduces the risk of the counterparty, but this does not reduce systemic risk .

People have drawn a conclusion in the study of the traditional financial cycle: the outbreak of the financial crisis is mostly due to the excessive expansion of credit . What is credit? Simply speaking, it is borrowing. It includes both traditional lending and borrowing in DeFi Finance, which we refer to here.

At present, the entire industry also regards DeFi Finance as a very remarkable thing. As a battleground for the major public chains, they are trying to expand the scale, and ordinary investors also recognize the next market, and they are willing to borrow and leverage. To amplify the benefits.

But as we said before , the most terrible thing in the entire blockchain industry is not the black swan event, but the systemic risk that everyone has become accustomed to, but it will inevitably occur from time to time . When systemic risks occur, the borrowing and leverage that are used in these DeFi finances will eventually be enforced, and this enforcement will cause the market to fall further and form a vicious stampede. Thereby forming a more substantial plunge.

DeFi Finance is the future, but DeFi Finance needs more things, not just borrowing; even borrowing should be modest and modest. We must know that all excessive borrowing today will be reflected in the form of a burst of tomorrow.

V. Conclusion

1. Most of the financial derivatives in the currency circle are of no practical significance and are extremely risky.

2. The borrowing of the currency circle needs to be controlled. Otherwise, the risk will be released in the form of a plunge next time.

3. DeFi Finance is the future, but DeFi Finance needs more than just borrowing.

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