Defi is in a very special position. Traditional finance includes financial technology. One of financial technology is blockchain. There are digital currencies in blockchain, and Defi is just a very small branch of blockchain digital currencies. But this branch is very hot recently, as long as you are in the currency circle, it is impossible not to know Defi. But many people have only heard of Defi and don't understand what is really good for Defi.
For example, you only know that YFI surpasses Bitcoin, but do you know why YFI surpasses Bitcoin? Why did YAM explode? Today I hope to use 1 hour to elevate you from a beginner in Defi to a relatively proficient.
With a definition, investment and analysis will not go astray. The definition of Defi is very simple. In a distributed system—the blockchain system we call—distributed applications—that is, Dapp—provide a decentralized financial ecosystem. Defi is an ecology, not a single coin or a project.
The particularity of Defi lies in decentralized distributed finance. The counterpart is centralized finance. We need to compare the two and analyze why Defi can flourish and develop so fast.
1. Definition and advantages of Defi
There are many functions in centralized finance. such as:
(1) Legal affairs, compliance, KYC, AML, accountants, law firms;
(2) The exchange, the China Securities Regulatory Commission, and the China Banking Regulatory Commission go to supervise the exchange. What the exchange and the China Securities Regulatory Commission do is to match transactions, review transactions, settle and supervise;
(3) Banks and brokerages. Do custody, payment, and lending.
(4) Central Bank. Provide currency.
These functions are implemented in centralized finance. Although it works well, it has many disadvantages. These shortcomings can be supplemented by Defi.
For example, there is no need for a central bank in Defi because it has its own digital currency. Bitcoin, Ethereum, EOS, USDT, USDC can all be used as the underlying payment method; Defi has smart contracts, and in Ethereum, the code is the law. So we don’t need legal affairs and judges, as long as there is a smart contract, we can judge which contract can be executed; we don’t need a contract either, just write the smart contract and it will be automatically executed when it expires. There is no contract dispute; because it is established in the district On the block chain, the contract will not be tampered with, and the contract does not need to be kept in a notary or safe; all transactions can be traced, transparent and fair; Defi is born without borders and intermediary.
These features of Defi can make up for the shortcomings of centralized finance. For example, centralized finance is difficult to universally benefit. Its transaction costs are very high, the transactions are complex, and the speed is slow, and there are intermediaries such as banks, exchanges, brokerages, accountants, and lawyers, all of whom charge service fees.
Defi is a supplement to the future of centralized finance. We cannot say that Defi can subvert centralized finance. This is unlikely, just as it is impossible for ants to shake elephants. But it is very good compensation and try. Centralized finance can make up for it in Defi if it does not do well.
2. The meaning of Defi to realize inclusive finance
In traditional finance, a quarter of the world's population, about 1.7 billion people do not have a bank account. Perhaps the bank has not opened a branch in the area, perhaps opening an account requires a lot of files and materials, and opening an account requires a management fee, which leads to some people not wanting or unable to open it. But 80% of people without a bank account in the world have mobile phones and can connect to the Internet. These people may be able to enjoy financial services. That is, Defi. Only decentralized distributed finance can minimize the cost and use mobile phones to connect to the Internet. The Internet realizes the popularization of finance.
The actual meaning of inclusive finance is "universal" and "benefits". "General" means everyone can participate, and "benefit" means low cost. Investment bank Goldman Sachs may charge dozens or millions of fees. I have worked in an investment bank before, and the salary of investment bank executives comes from handling fees and service fees.
Benefits of Defi's financial inclusion:
1. The entry barrier is very low. Only need a mobile phone and connect to the Internet to borrow, pay, make derivatives and insurance;
2. Reliable. Are written into the code;
3. Transparent, open and open. Defi's opponents, even investment banks, are equal. No one can have an advantage. There is no information, position advantage, no lower rate, faster efficiency. It cannot be done in traditional finance;
4. No counterparty risk. In the past, whoever P2P lends money to, if the other party defaults, they can only rely on the P2P company to collect the debt. If the P2P company runs away and the other party does not pay the money, the money will be gone. In Defi, the form of pawn or mortgage is strictly used to ensure that the counterparty can pay and repay the debt. At the same time, the smart contract is used for lending, as long as the time is up, the oracle and the link are added, and it will be executed immediately without any mechanism. Can minimize the counterparty risk;
5. Reduce the risk of intermediaries. Defi has no intermediaries, only smart contracts. The cost will also be reduced because there is no intermediary;
6. Composability. For example, UMA, Synthetix, everything can be used as derivatives, gambling, contracts, and one person can create contracts. Like Lego bricks. Synthetix will recently launch a derivative based on Tesla stock. Combinable and programmable is a major feature of Defi, which will make financial products particularly rich, I'm afraid you can't think of it.
Various characteristics make Defi glow with vitality. If you follow my official account, you should know that the Defi conference was held in Chengdu, Sichuan last September, with seven or eight hundred people throughout the day. I also talked about Defi at the World Internet Conference in Wuzhen. If you bought any of the coins issued by Defi at that time, I believe you have become rich now. New things, especially things with potential and vitality, must be cared about.
3. The ecology and development trend of Defi
1. The scale of Defi
In October last year, Defi locked up only 50 million U.S. dollars, reaching 100 million U.S. dollars at the beginning of the year, and rushing to 1 billion U.S. dollars in February and March, and now locked up 6.7 billion U.S. dollars. Hedging is an important parameter of Defi. You don’t know who the other party is on Defi, so you must mortgage and lock your position. The transaction volume is just a parameter. Which market and product can increase its volume a hundred times in a year, only Defi has.
2. The ecology of Defi
First of all, there must be the underlying public chain. Defi's public chain is based on Ethereum. 95% of Defi uses Ethereum, and EOS and Bitcoin are used. Ethereum has smart contracts and they are widely used. Bitcoin's smart contract capabilities are very poor, although it belongs to the leader of encrypted digital currencies;
The second is payment, which uses stable currency. Defi has its own stable currency, such as DAI, which is a stable currency specially made by Marker for payment;
It is borrowing and lending again, and then trading. The trading will be divided into normal trading and derivatives trading;
The other is wallets and brokers, exchanges, and oracles (insurance) and gambling. The oracle is to provide a data interface, allowing real-world data to be connected to Defi's financial products;
Finally, asset management and financial management.
The other is relatively niche analysis tools, collection tools and aggregators. KYC, etc., can be found on Defiprime, the project is the most complete.
4. How to participate in Defi
There are six easiest steps:
Step 1: Build a wallet first. I use Metamask, which is universal and everyone will use it.
Metamask wallet is very convenient, but some people like to use exchange wallets. At present, I know that only Coinbase provides Defi services on exchanges. I don't know if the three major domestic exchanges are connected.
The Defi circle is ten times faster than the currency circle. Someone joked that traditional finance is like a day for ten years, and there is no change in ten years. Financial technology is a little faster, and the currency circle is much faster than financial technology, so there is "one day in the currency circle, one year in the world". After Defi came in, the currency circle became a classical currency circle, and Defi changed faster.
I saw a few days ago that only Coinbase can use the wallet to connect to Defi. I wonder if the three major exchanges have caught up. Now the exchange is under great pressure, and the business has been taken away by Defi.
Wallets include real wallets, wallets with bank accounts, such as WeChat and Alipay, which belong to this category, as well as the central bank digital currency wallets after the central bank figures are released, as well as the hard and soft wallets provided on the wallet service, as well as digital The wallet provided by the currency exchange, and finally the wallet provided on the Defi service.
What is stored in Defi Wallet is encrypted assets. This is not the core. The core is self-management or custody, whether it is handed over to others or self-managed. The advantage of Defi Wallet is that it is self-managed and safer. Put it on the exchange, what if it gets hacked? If it is lost in the bank, there is usually compensation, and the exchange is generally not compensated if it is hacked. In terms of convenience, it is more convenient to put on the exchange, but the security is relatively poor.
Step 2: Recharge. Recharge from other wallets. Generally, ETH is the most used. You can also recharge USDC or USDT. USDT is not very useful in Defi, it seems to be despised.
Why do we use the DAI stablecoin in Defi more than USDT? Because everyone is not at ease with USDT. Stable coins are created because digital currencies are too volatile. The reason for using digital currency is because the legal currency has been inflated, spam, no restrictions, depreciation, and national boundaries. So because the legal currency has so many shortcomings, with the digital currency, the volatility of the digital currency is too great, and there will be a stable currency, and the stable currency has insufficient reserves. It is said that it is a one-to-one peg to the US dollar, but it is not fully audited and opaque. So everyone is not at ease with USDT, so they have to make a stable currency DAI in Defi.
DAI has sufficient (excess) mortgage, relatively transparent audit, distributed management, and no risk of running away. Make up for the deficiencies of other currencies. The scale of DAI is now 400 million US dollars. USDT has 10 billion U.S. dollars and has been sending out, desperately sending out.
DAI is a pawn stablecoin issued by the pawnshop Marker. People who go to the pawnshop need to borrow money and need to mortgage an item, such as a Rolex watch, which is worth 50,000 yuan, lends 10,000 yuan, and comes back in three days and gets 12,000 to redeem it. DAI is the same as a pawnshop. One person uses Marker to mortgage ten Ethereum and lends 2000 DAI. After ten days, you may have to return 2050 DAI, and then return 10 ETH to me. DAI is a pawn stablecoin issued by Marker and secured by digital currency. At the beginning of the issuance, only BAT and ETH can be mortgaged. Now it has expanded to more than a dozen currencies.
There are several important data when mortgage, one is the mortgage rate. For example, if you mortgage ten ETH, worth 4000 US dollars, how much DAI can you give out, 50%, 60%, but it is impossible to reach or exceed 100%. The pawn mortgage rate will be less than the value of the mortgaged assets; the second is the lending rate; the third is the clearance rate. If the market value fluctuates too much and a certain threshold is triggered, the mortgaged currency will be cleared. This is the same as leverage, because the volatility is too large and the position is cleared by the exchange. Pay attention to these few data when you mortgage for stable currency.
The third step is to choose the method and project you want to participate in. Such as investment, borrowing, financial management, buying insurance, and doing derivatives transactions. After you select the website and open it, you will be asked if you want to connect to the wallet. Connecting to it will usually lock you up.
Lending is the most primitive financial activity of mankind, and where there is finance, there is lending service. Lending is also the biggest product of Defi. In the past, lending could only be borrowed from banks. The emerging consumer loans, P2P, and online lending, but P2P has been wiped out and subject to many policy restrictions. The judicial upper limit of private lending rates has been reduced from 24% recognized by the court to 15.4% , It is also difficult to do.
Defi has many innovations to solve these borrowing problems:
1. Degree of difficulty. If you want to borrow money, the biggest problem is that the less money you are, the less people dare to borrow you. The richer the bank, the more willing to lend you. Dislike the poor and love the rich. People who are really short of money generally cannot borrow money when they go to the bank. Consumer loans and online loans also require review and credit records. Defi does not need these, because it is relatively easy to mortgage with digital currency.
2. KYC is not required, it is transnational. Any other loans can be cross-regional, but still within the country. Only legal currency is limited, and it is impossible to borrow US dollars.
3. Dynamic adjustment of interest rates. No other lending can be adjusted with market dynamics. Because Defi uses smart contracts and algorithms, it can calculate at any time what the interest rate is at this moment and what the interest rate is next.
4. Borrowing fees are very low. Because there is no intermediary and opponent risk. But here only refers to the borrowing fee, the gas fee for the transfer fee is getting higher and higher. This is not because of the Defi project, but because of the Ethereum GAS fee, which is as high as 10% of the handling fee, which is even worse than the bank.
One of the more famous projects in lending is Compound. Its liquid mining token COMP has ignited this wave of Defi enthusiasm. Another project is Aave, which has grown very fast (the latest data Aave’s lending volume has ranked first) Compound is the absolute boss. Their borrowing rates are sometimes different.
Aggregators are also popular nowadays. Log in to the platform to glue all lending platforms together.
In addition to borrowing, there are other financial management, insurance, and derivative transactions. I have the opportunity to write an article on the official account to elaborate on the time relationship.
The fourth is lock-up and mortgage. Generally, it is the amount of Ethereum locked, and there will be some handling fees in the middle.
The fifth step is to see that there are rewards or risks,
The sixth step is that you initiate a redemption, release the locked currency, and calculate the interest to be paid or the income harvested.
These steps are simple and easy to say, but difficult to say. I am considered a person in the old currency circle, and I have also read a PhD in Finance. I also find it very creative to watch Defi's financial derivatives, and there are many points that can be dig deep. The current society is to reward people who know how to dig deep and try to eat crabs.
5. DeFi exchange DEX and derivatives
In the classical currency circle, exchanges are the most profitable, with Huobi, Binance, and OK being the top three. But they have many drawbacks. One is that all the coins are placed on the exchange, which will lead to hacker attacks, and there will be more or less incidents of the Mentougou Exchange being hacked; the second is the handling fee. Suppose that a small coin is not available on one exchange and needs to be bought on another exchange. Then go to Defi, the middle three to four steps, each step must be paid. There are fees for transactions and transfers.
The exchanges in Defi only need to find an opponent in the liquidity pool and exchange directly, turning the four or five steps into one step. The handling fee is relatively cheap, and the accounts are managed by themselves, not on the exchange, which is relatively safe, fair and fair.
The exchange in the currency circle opens derivatives, and everyone is worried about the pin. Because it is centralized, it may be downtime, or it may be intentional, I don’t know. But it is impossible for a decentralized exchange to be able to manipulate prices. Therefore, decentralized exchanges are getting more and more popular. Last year, major exchanges despised Defi, thinking that there was no liquidity and could not be done. But I did not expect that this year there will be a liquidity mining model, and liquidity will rise, and the Dex exchange coins will fly into the sky. In layman's terms, the exchange is a "casino", and it is profitable without loss, so the exchange tokens will have such a large appreciation.
DeX can draw the traffic of classical exchanges to Defi. The amount of Defi locked up can range from tens of millions last year to several billions this year. Where the money comes from, it should not be new funds, but stocks and existing funds. It came from the original exchange wallet. Centralized exchanges were seriously injured in this wave of Defi boom. So they are all follow up, follow up through the establishment of funds and other methods. They know this is where the big money is concerned, and it will be dangerous if it doesn't keep up. OK is done quite quickly.
The largest of the Dex exchange is Uniswap, and everyone should pay attention to the currency issued. Curve is emerging.
Simply talk about derivatives exchanges, the advantage is that they will not be monopolized, and you can design any derivatives you want. In traditional finance, only investment banks and exchanges can design derivatives, and transactions are large institutions. Defi lowers the threshold to an extremely low level, and anyone can make derivatives or even design derivatives. The Synthetix just mentioned is the best among derivatives. To launch Tesla's derivatives recently, you can use currency to go long and short Tesla's stock. Apple stocks, gold, foreign exchange, and Nasdaq indexes can all be exchanged on Synthetix.
Because derivatives are off-chain assets and require fair people to provide price standards, Chain Link appeared. This is why it has become the fifth largest currency in market value, and it has become so popular recently. The expansion of exchanges and the popularity of Defi have made oracles and data providers the focus, pushing the market value of Chain Link to a high point. In fact, Chain Link has been around for many years. The current market value of Chain Link is 5.8 billion U.S. dollars.
YFI is an aggregator. You can see which interest rates are higher and liquidity is better, which can be used as wealth management products, and you can invest whichever is better. I call it a financial aggregator.
Six, Defi's risks and inspiration
1. Code risk
Someone recently bought YAM. If they are late, they will lose a lot of money now. Many times, because smart contracts are too transparent, all the codes are on it. If code auditing is not done, some vulnerabilities will create technical risks. YAM is the code problem. It returned to zero in 37 hours, a drop of more than 90%. Again, it shows that Defi's code is very risky.
In February of this year, a project BZX in Defi also lost more than 4,000 Ethereum because a hacker found a loophole in the code. The price at the time was almost $1 million. So everyone should be careful when trying. Defi is still very new.
2. Liquidity risk
The most obvious case is that on March 12, Bitcoin plummeted, the currency circle plummeted, and all locked positions were liquidated. The stronger the liquidation, the lower the price, which would cause a stampede, which creates a huge liquidity risk. But in March, Defi's overall lock-up was less than $1 billion. If huge fluctuations occur now, huge liquidity risks may occur. Everyone must be cautious. Before making money, think about not losing money. Surviving is the secret to winning in the currency circle. A lot of people made a lot of money, but they lost it in a month or two.
3. Operational risk
Because of operating errors, anyone will have this. Because Defi supervises the wallet by itself. Don't forget your password. The Metamask wallet uses twelve mnemonics, and no one can save it if you forget it.
4. Inspiration from Defi
Defi is now on the rise, the trend development is greater than the risk, and Defi is out of the circle. Derivatives exchanges are actually out-of-circle tools, allowing all assets under the chain to be linked to the chain for derivatives.
Defi can serve the real economy. We have always said that the currency circle is a zero-sum game, but if Defi can connect real assets, it will be able to generate real value. I don't want ICO to purely cut leek. Defi has real projects whether it is liquid mining or self-issued coins.
The size of Defi is huge, and the size tells everything. The volume has reached 6 billion, and it is estimated that it will continue to rise;
Defi increasingly involves the underlying knowledge of finance and technology. If you don’t understand, just do storage and lending, so you don’t touch derivatives. It is best to do professional things with professional knowledge, not AII IN that you don’t understand, in case there is a liquidity risk. When you see those who make money, you must also know that they are making money by taking risks as above. Higher risks mean higher returns.
For developers, make user-friendly applications. Defi has become relatively convenient this year. But the transaction fee is still very high. Although the project party does not charge very high, but the gas of Ethereum is unbearable.
Impact on exchanges, derivatives contracts on classical exchanges, wallets, assets, and spot transactions will all be affected by Defi. If you are an exchange or work in an exchange, you really want to transform, follow up Defi.
Domestic people have been slow to Defi, while foreign countries have studied Defi very early. I wrote Defi's article a year ago, and all I read were foreign materials, and this is also true now. Because there are a lot of domestic currency speculation, there are few projects. I have not seen which Defi project that has successfully ranked in the top ten is made by the Chinese. It is true that doing projects abroad is much more focused and innovative than ours. I hope that a good Defi project in China can be launched as soon as possible. Because there are many speculators in the country and many people are chasing, the market should be very large.
In the future, DCEP will come out, it does not rule out that Defi can be integrated into it. Of course, government supervision may not allow it, and it will not. But Defi is a system that can use various currencies for underlying exchange. In the future, it is entirely possible that the central bank's digital currency will become the underlying currency of Defi. Or Libra. Because Defi is inherently open and does not exclude any underlying currency. Bitcoin, Ethereum, EOS can be used, as long as there is a smart contract function, it can be compatible.
7. Interactive Q&A
1. Defi IDO has also become popular, but various Defi projects are uneven. How to treat this phenomenon? Will IDO eventually become an ICO?
It's very good. There is nothing at the bottom of the ICO, and everyone can publish a white paper. But Defi issuance really needs a foundation. Several big pens issued now, Link, COMP, and Curved all have real application scenarios. It will not be as empty and empty as ICO. IDO is one level higher than ICO, not even a securities issue. The currency issued by Defi is more of a use function, not a securities function. It has more use attributes than equity attributes.
If in the future Defi becomes large, it will be included in supervision, and it is even possible to issue public tokens, just like Ethereum. I don't think that IDO will end up being a feather, the threshold and the underlying mechanism are different.
2. Defi is hot, but it won't last for a long time and then cools down. How to maintain popular hot spots? EOS and other public chain fees have more advantages than Ethereum. Why is Defi concentrated on Ethereum?
As I said earlier, Defi is hotter than the traditional classical currency circle, and the time required to convert each hot spot will naturally be shorter. Because it is a new product, everyone is very concerned about it. But because it is open-ended, there are always new projects rushing out. Everyone is in the era of rushing horses, and no one can monopolize the market. Just like Compound I said last year that Defi was already the top spot, but it has now been surpassed. It is certain that the popular hot spots will change quickly.
How to maintain it bluntly is that the currency price rise will definitely be maintained. But it really depends on the users in the end. The more users there are, the lower the fees charged, and the more tangible products we bring, the longer it will last. Liquidity mining is just a hot spot. The hot spots must also be speculated, but when the hot spots pass, everyone still has to fight for their strength. If you do a good job of your strength first, then go to the hot spots.
The foundation of other public chains is not as big as Ethereum. The originator of smart contracts is Ethereum. One of the most important features of Ethereum is that it may become the second futures product listed on the US exchange. Bitcoin has been recognized by the traditional financial community and has been on futures. Ethereum may become the second. Because decentralization is done very well, it may be regulated by the United States as a futures product.
The ecosystem of Ethereum is definitely larger than other public chains, and there is definitely a head effect. At present, 95% of Defi uses Ethereum, which will produce the Matthew effect of the strong. Everyone uses Ethereum as the bottom layer, and other public chains are just candidates. The trend of diversion is not obvious, and it is not easy for other public chains to catch up.
3. How will the high gas of Ethereum be solved in the future?
I also want to know why gas is getting more and more expensive. I think Ethereum needs to upgrade to 2.0, if it can increase the bandwidth. If not, if things go on like this, it will damage the development momentum of Defi. Then other public chains will have opportunities. Although 2.0 may take a while, at least there is a direction I will be willing to wait. But if GAS is still very expensive after 2.0 is implemented, it will be abandoned. Let the market decide.