If you compare financial services to the catering industry, blockchain is like a food delivery system, turning the original cumbersome and inefficient offline services into online, and the DeFi project on Ethereum is like a “digital currency bank.”
Written by: Andrew Bakst, Bachelor of Engineering, Stanford University, founding partner of Bizantine Capital Translator: Ling Ziang
The shift from digital economy to real economy
It can be said that Ethereum has transformed the originally complicated banking business into a more routine catering industry, and has combined the two together. On the one hand, the Ethereum platform provides various applications, just like restaurants providing you with food; at the same time, Ethereum itself can generate value-added and pledge interest, just like a bank provides you with income.
In the traditional financial market, there are many and varied financial products. Consumers can choose better choices in the current banking industry (a “big bank” monopolized by a few industries), but also include the catering industry. Because the bank is a fully digital service, at the same time, food needs to be done by people. In other words, the only way to eat authentic Brazilian cuisine is to meet Brazilian chefs within your personal relationships. In Ethereum, you can taste delicious food through the Brazilian vertical farm established in Sao Paulo without leaving home.
How do we understand the phenomenon that the development of blockchain technology has caused a significant increase in the output value of banking services? Banking can be divided into two sub-sectors: commercial banking and investment banking, both of which will be completely “catering” by Ethereum. Commercial banks can act as short-term traders and long-term investors to purchase debt, stocks and commodities. Investment banks raise funds (ie financing) for companies (new share issuance), mergers (mergers) and other banks (such as private financial institutions).
commercial Bank
First, we analyze the impact of Ethereum on retail investors in commercial banks. Of course, the same analysis theory can also be applied to investment banks. The commercial banking industry of Ethereum will also develop in accordance with specialization and aggregation to a large extent, just like although some companies are unique in certain food or beverages and occupy the leading position in the niche market, department stores and Amazon But it can still complete the full coverage of such products. Then, we can divide investment strategies into the following four types.
- Industry-oriented: Some bankers may only invest in biotechnology, clean energy, or similar high-tech industries. In these industries, bankers have more profound and unique insights to discover potential high-quality projects. Just as we have reporters covering specific industries, we also have corresponding professional bankers. In fact, this approach has long been commonplace. Certain companies have certain investment departments that have greater power than others. But the depositors have not really felt the benefits of this approach. Because, you have to deposit money with Morgan Stanley, not directly in Morgan Stanley’s biotechnology investment department.
- Region-oriented: Some banks may only invest in countries and cities where they have advantages. Just as there are reporters covering specific fields, there are also bankers who focus on building their own advantages in information, knowledge and resources, but the difference is that the discussion here focuses more on regional expertise rather than industry expertise.
- Algorithm-oriented: Some banks may only invest based on algorithms developed by them, similar to modern quantitative investment companies. It includes short-term market-making strategies and long-term quantitative investment strategies.
- Strategically agglomerated type: Some larger banks may acquire other banks. [1] This will attract a lot of capital, and due to diversification, its effect (risk-adjusted rate of return) will be significantly higher than entrusting to a few strategists (some people will still choose to do this because they believe The investment strategy of some strategists is better than that of strategists of different styles), because the converged platform can draw more wisdom and insights from people of different styles. [2] This is why Twitter itself is more valuable than any writer on Twitter, or YouTube is more valuable than any YouTube video blogger, or Facebook is more valuable than any Facebook user. I believe you are aware of the point-in blockchain technology, we may rely on this model to change to reduce the profits held by these platforms (and increase the profits of the creators on the platform, the strategist in the case of YFI) , Because the middlemen have been swept out, so that creators have more profit rights. Of course, for middlemen and strategists, making money may be more attractive than how to make money, because money seems more direct than a combination of information and strategy. [2] These banks may achieve cross-industry, regional, and algorithmic strategic diversification; they may even carry out internal diversified strategic competition, just like Amazon launched its “best-seller column”. All content will be presented in this convergent platform way.
The winners of the above four investment strategies are based on brand and high-quality customer service, that is, the consistency of investment products and strong marketing capabilities. Although marketing is also based on the advantages and characteristics of the service to instill a concept and image to users (for example, Tesla’s philosophy-the best car anyone has ever taken), customer service stands for everything and has always been the case.
With the continuous upgrading and optimization of banking services, what kind of investment products and services can attract people?
- Promise the highest possible return, which is enough to attract people to deposit money. When a bank I trust provides investment products with a yield of 9%, even if I really like the goals and style of another bank, if he only provides a yield of 1%, I will not deposit my money.
- Consistently fulfill the promise of revenue. If the bank promises you a 9% yield, and in the end you only make 5%, you will not be satisfied.
- Compared with competitors, you have a stronger competitive advantage, especially in terms of cost.
These three requirements are guaranteed based on the team, ability, and asset scale. As the ability grows, the asset scale will continue to increase until it reaches the turning point of the rate of return. [3] Of course, this is obvious, but we still have to analyze these three factors.
team
The team has various forms, from self-employed to multinational groups (such as Facebook, Youtube, etc., all have multinational creators). The success of the team is based on wisdom, professional ethics and team size. The best team will be composed of the most talented and hardworking founding team members. This is the form of team competition formed in a highly competitive market environment. 【4】
Therefore, when we decide which “bank” on Ethereum is the best investment target, we will consider the following factors:
- A team with outstanding ability and professional ethics. Through the data on the chain and Github, we can see when the developers are working, so we can judge which developers are lazy during working hours.
- Of the four strategies mentioned above, which one we are more focused on. We believe that an aggregation strategy is more likely to create a successful investment bank within the Ethereum ecosystem. We also believe that this will attract the best teams and strategists because it gives creators the most space to implement product designs.
- Team/community size, we think this largely reflects the first two factors: gathering the best talents in the market and forming a team can attract the largest capital from more people, thereby building the largest community and largest Asset capacity. The growth of the community will help promote the development of the team’s brand and culture. The increase in asset capacity will help realize the economies of scale brought about by the decline in the cost/income ratio.
- Good incentive mechanism. (Whether it’s stock issuance or revenue sharing) As an aggregation platform, sharing most of the revenue with strategists and developers is the best incentive mechanism. By reducing the distribution weight of capital gains, more revenue is tilted to strategy Builder and creator. (YFI did this recently. Although we still don’t know if their distribution strategy is too much or too little to tilt, there is no doubt that this must be a revolutionary step).
So far, our hypothesis has been verified by the successful performance of YFI (the best Layer 2 development project). And, as our previous analysis predicted, YFI has become a market-leading asset management aggregation platform. YFI also has the largest currency circle community and the most professional developer community. This is mainly because it combines innovative technology products (the first asset management aggregation platform) and innovative token economic model (we use it It is called “fair launch”, that is, a completely fair launch mode, no financing, no POW mining). Finally, the YFI community stated in its recent governance proposal that it decided to take action “non-monopoly” instead of competing for strategists and developers. We believe that a “non-monopoly” style of behavior is crucial to market leadership, because open and inclusive cooperation with other projects in the same industry can achieve ecological co-prosperity in a highly competitive market more than a monopoly.
Therefore, we are very confident that YFI will become a leading global investment bank in the digital currency field. Although we cannot accurately assess the value of such a bank, to make a simple analogy, Starbucks and McDonald’s are the most profitable restaurant chains in the world. If they reach their influence, we can speculate that such a global investment bank is worth at least 100 billion yuan. Dollar. However, given that the place to store funds may be more important than the place to drink coffee, we speculate that the value of such a bank may even exceed $500 billion. Although drawing this conclusion is very arbitrary, it is precisely because of such a very wide range of potential errors that we may also foresee significant volatility in the market valuation of such a project. 【5】
Let us evaluate the strategists who are still profitable using the other three investment strategies
The first three investment strategies (industry-oriented, region-oriented or algorithm-oriented) each have their most advantages. Professionals will make application investments based on their own independent judgments, but from a longer-term perspective, wisdom, career Conduct and influence (although this is closely related to the first two variables) will be more important. Ethereum’s impact on the banking industry is the same as the Internet’s impact on journalism; reporters provide information (a platform with the best reporters will be more likely to succeed and make more money than others), and banks provide income. But let’s put it another way, the banking industry’s transformation will be more like sports than journalism: you can’t question LeBron James’ statistics; but you can question who wrote the newsletter that provides the greatest investor information Advantage. Therefore, in the end, we should quantify the analysis based on the anonymous but auditable or trusted investor performance data of each data source based on Ethereum, and which news brings the most significant investment utility.
For strategists who have the advantages of these three investment strategies, the most difficult decision is whether to work for a converged platform, work independently, or choose both ways of working at the same time. For convergent platforms, it provides tools or user interfaces that can minimize the cost of strategists releasing their investment products on Ethereum. YFI is already moving along this path. It makes sense for the convergent platform to implement this feature for free, because it will help attract future partners and accelerate the improvement of the user community.
Strategic analysts will deploy centralized strategies through a convergent platform, so that on the one hand, they can ensure the safe release of smart contracts (so that they can ensure the safety of investors’ funds), and on the other hand, they can better attract capital due to brand clustering. Where branding means everything, obtaining an endorsement from a well-known platform is equivalent to obtaining a product sales license at Whole Foods or Starbucks. Yes, if you want to bring market share, you need to pay a certain cost to the convergent platform, but these costs are worth it, especially because strategists can buy platform equity or tokens early in the platform. Therefore, if the final platform stands out, they can get more benefits from the platform.
How does the converged platform work?
Aggregated platforms trying to mass-produce investment products with considerable yields must make difficult decisions: Which industries are most suitable for investment? Where is it? What strategy? At present, the decision about investment opportunities on Ethereum is quite simple, mainly because the type of investment/lending products of Ethereum is very single (not the implementation code, but the financial theory used). So far, several types of participants of convergent platforms have focused on the digital currency industry itself, especially miners and traders (that is, traders who use stable currency borrowing & mining to obtain digital assets, asset arbitrage or magnifying trading leverage These needs, etc.). However, over time, the decisions made by these convergent platforms will become more complex. How will these convergent platforms continue to operate in a surplus industry of lenders, investors, and market makers? The best solution is to allow a decentralized community to make decisions independently, and YFI has already achieved this: all strategies are open and allow users to choose independently. Naturally, the end result is that the strong will always be strong, and then the aggregation platform can Provide “platform sponsorship” for these more recognized products.
Operation Model of Investment Bank
Investment bank brokers will also provide services to commercial bank customers. Want to invest in Pre-IPO? Want to participate in mergers and acquisitions? Or participate in a new private equity fund? Just as Ethereum will allow anyone to become a commercial banker to absorb deposits and borrow, it also allows anyone to become an investment banker to design investment products.
Investment bankers will carry out risk diversification configuration the same as commercial bankers: according to different industries, different regions, different algorithms and different aggregation platforms. However, the user does not directly face the terminal’s strategist’s payment, but instead pays the broker. Obviously, the salary of a strategist is likely to be higher than that of a broker, and for the same reason, the salary of a hedge fund manager will be higher than that of a top investment banker. In addition, brokers charge fees based on the completion of each transaction, while capital managed by strategists is charged through long-term performance. From this perspective, brokers are just channels for strategists.
in conclusion
Like the catering industry, the competition for investment products on Ethereum is also very fierce. Although those successful in the Internet era can also stand out in the web 2.0 era because of their experience and inertia, in the new era of blockchain, this path The advantage of dependence is gone forever. In the blockchain era, the biggest winners are likely to be these aggregation platforms. Coincidentally, the value of today’s aggregation platforms for news content far exceeds any specific publication (industry-oriented and regional-oriented investment banks can be Regarded as a news media in a subdivision, no one is more valuable than Facebook). Because of the inherent open source nature of Ethereum, anyone can launch an aggregate platform (ie, Facebook or Twitter) to prevent an aggregate platform from extracting monopoly rent through its advantages of scale.
In the Web 2.0 era, the project’s moat is mainly formed through the effects of capital power (for finance), data (for the market), and capital agglomeration. In the era of public chains, this Web 2.0 moat advantage no longer exists.
However, even if there are no more Web 2.0 products that rely on capital (or data) to construct advantages, the scale effect of banks (and media) still exists: the more capital a bank has, the better trading resources they can obtain (for example, The right to provide preferential loans to large companies, like Airbnb in financial trouble). In addition, the more capital a bank has, the better the service they can provide to each customer under the same cost conditions, until the inflection point of the scale effect of income is reached. However, it is a pity that at present the inflection point of the scale effect of global savings products is still unknown.
The inflection point of the scale effect of income depends on the attributes of the funds owned by the strategist and the marginal rate of change of their income, both of which are based on professional skills (that is, talent capabilities) and the number of talents (that is, how many analysts do their best use).
For users, fees are a very important factor, including how these fees are distributed between bank shareholders and the strategists who create value for these shareholders. With the blockchain, this means that more funds will be provided to users and talents, while less money will be provided to monopolistic middlemen. awesome! Every investor will like this approach, even investors in these emerging monopolistic middlemen (a platform that aggregates these talents and investment products). Because we believe that, as a multinational bank in the blockchain era, the value of these aggregated platforms will be far greater than trading platforms that only use APIs to provide technical support for strategists; this will also be more conducive to the discovery and training of talents, so , Traditional hedge funds will be replaced by these new low-cost but high-yield investment products.
We firmly believe that YFI will become the leader of the convergent platform. YFI has the best development team, the most innovative strategists (the two groups also partially overlap), the best user community and balance sheet (outstanding teams are often also attracted by this Function is very important, because team members may also become shareholders-many digital currency investors, whether value investment or quantitative investors, may become shareholders of such platforms), and the best brand influence (excellent team and Fair token economic mechanism, coupled with innovative product design, thus attracting a wider range of community members to join). For these reasons, as long as YFI continues to make wise governance decisions, we believe that the investment banking competition on Ethereum will quickly win out.
Endnote
[1] We can find other convergent platforms, for example, by searching the project names listed on the decentralized exchange. Of course, the Ethereum ecosystem has a significant moat, just like a catering giant.
[2] Most people just care about how to make as much money as possible, let others choose strategies and how to get the highest risk-return ratio (which industry, which country, which algorithm, etc.).
[3] It is still too early to announce that any player of a certain subdivision of the track becomes the winner based on the size, although we will slowly see the emergence of the winners, as shown in the later chapter on cost structure Narrated. Therefore, the winners in this area mainly win through the team, which means that the best players will build the best investment products in each segment.
[4] Blockchain forms a monopoly at a more basic level (that is, the Ethereum ecology), not at the application level of banking products.
[5] Of course, the final facts may be very different: the best result, the leading Ethereum Bank has become a world savings bank, and more than 60% of the funds are stored there. The worst result is that the leading Ethereum bank cannot retain talents, because for high-end talents, leaving the current project to build their own project products is more profitable for them, so the current leading Ethereum bank It is impossible to reach the height of Starbucks. However, we believe that for elite talents, it is more beneficial for them to start their own projects if they cooperate with the leading aggregation platform instead of working independently, and rely on a greater brand effect. Because the leading convergent platform has a better chance of attracting capital to enter than a talent alone.
