In the future, lending and trading businesses will be on the same financial market infrastructure, the distinction between the banking industry and the securities industry will gradually become blurred, and there will be a trend of convergence.
Original title: “From DeFi to See the Integration Trend of Banking and Securities Business”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry
Since June, the two most representative applications of DeFi, Compound and Uniswap, locked digital assets have seen rapid growth (see Figure 1 and Figure 2). These two DeFi applications have been so highly welcomed by the market recently. What enlightenment does it have for us?
Figure one
Figure II
Compound is a mortgage loan application. Any user who has idle digital assets can put their idle assets in the Compound pool for other users to borrow. The borrower needs to mortgage another asset he owns to lend the digital asset he hopes to obtain. Compound automatically monitors the mortgaged assets according to predetermined rules. When the market value of the mortgaged asset drops to a critical point, the Compound smart contract will automatically notify the user to cover the position. If the user fails to cover the position in time, Compound will automatically execute the contract to sell the mortgaged assets to prevent the loss of the lender’s assets. The above process is completely automatically executed based on the rules determined in the smart contract, without any human intervention.
We can see from Figure 1 that the number of assets pledged in Compound has been stable until mid-June this year. Since mid-June, it has seen a skyrocketing trend. This is because the Compound team issued the governance token for this DeFi application. Any user who lends assets in Compound and users who lend assets can obtain these governance tokens based on the number of assets they have locked and the number of assets they have lent. In order to obtain these governance tokens, the speculative power in the market locks a large number of digital assets in Compound.
Uniswap is an automatic market making application. Any user can use Uniswap on Ethereum to establish a trading pair between any two digital assets and provide initial liquidity. Any other user can trade the asset pool for this transaction. The commission paid for each transaction is returned to this liquidity pool. The more trading volume, the more profit this liquidity pool will generate. After this initial liquidity pool is established, other users can continue to provide more asset liquidity to this liquidity pool. If some providers recover the assets they provide, then they can get the corresponding commission income earned by this liquidity pool based on the proportion of the liquidity they provide in the total flow.
As we can see from Figure 2, Uniswap also began to show explosive growth in June. I think one of the main reasons is that the increase in the number of liquid assets generated in Compound has led to more digital assets flowing into Uniswap. Speculators earn interest income by providing liquidity. Obviously, the interest earned from Uniswap will exceed the interest income from collateralizing assets in Compound. Therefore, a large amount of speculative funds in the market began to arbitrage these two DeFi applications.
From the rapid growth of the above two DeFi applications, we can see business scenarios that are likely to appear in the future digital financial ecosystem. The future digital financial ecology must be based on distributed accounting technology. On top of such financial market infrastructure, more DeFi applications will be developed. Both Compound and Uniswap are now developed and run on Ethereum. Similarly, various DeFi applications in the future will be developed on the same blockchain, and the applications will affect each other.
In the current financial market, lending business can occur both in the banking market and in the securities industry. Since the two markets operate on the support of different systems, users cannot use their assets efficiently. Similarly, trading business is also carried out in the bank market and the securities market. But they usually trade different financial products. In short, the lending business and transaction business are currently carried out in the banking and securities industries at the same time.
In the future digital financial ecosystem, all financial services will be conducted on the same financial market infrastructure. Users can directly carry out their lending business on this infrastructure. The difference from the current DeFi application is that in the future, digital currency will be mainly used as the basic value transaction medium. Users use digital currency for various financial services. Therefore, the main lending method should be to borrow digital currency through mortgages for the digital assets it owns. But this lending process can be completed by DeFi. After borrowing and lending digital currencies, users can directly use these digital currencies for payment transfers or transactions.
Similarly, the same transaction mechanism as Uniswap can be easily generated on the same financial market infrastructure. As we have seen in the operating mechanism of Uniswap, paired transactions between any two digital assets are very easy to generate. Therefore, the trading market can effectively price various digital assets in the market. I mentioned in my research articles and video sharing that in the future trading methods of digital finance, direct transactions between peers and centralized matching transactions will coexist. Due to the characteristics of emerging digital financial products, peer-to-peer transactions will increasingly become a major transaction method. DeFi applications such as Uniswap are a new transaction method in addition to the current transaction method based on order book. The pricing of digital assets will therefore be more accurate.
Because the above lending and transaction services use the same financial market infrastructure and the same transaction medium, digital financial products are produced and circulated in the same way, and financial services are automatically carried out by means of DeFi. Therefore, the current banking industry in the financial market The division of the securities industry is not obvious, and there will be a trend of convergence.
