Can crypto exchanges help DeFi usher in its second spring?


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From the “direct investment” of DeFi projects, the construction of infrastructure, to the entry of the DeFi track through the original public chain, we found that cryptocurrency exchanges are actively empowering the decentralized financial industry and expanding ecological value. It is undeniable that, from a proportional point of view, the number of DeFi users accounts for only a very small part of the users in the entire encryption industry. At present, its value is still in a depression, so there is still huge room for growth. Global inflation expectations and earnings are declining traditional financial products. It will also promote more mainstream users to choose DeFi.

For many in the cryptocurrency industry, the most “familiar” regulatory agencies may be the US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC).

How powerful are these two regulators? In 2020, after BitMEX was prosecuted by the CFTC for violating the Bank Secrecy Act, Samuel Reed, the co-founder and chief technology officer of the exchange, was directly arrested by the police at the Massachusetts airport; in addition, if the tokens are deemed to be “unregistered securities” If they do, they will be prosecuted by the SEC and face huge fines of tens of millions of dollars, from KiK and Telegram before to Ripple. It is said that the SEC has issued a record $140 million in fines to the crypto industry in the past three years.

It can be said that if the scopes of the SEC and CFTC are aimed at which cryptocurrency company or project, their fate will definitely be ugly.

However, although the SEC and CFTC play a pivotal role in the US financial sector, they are not actually the “five core regulatory agencies” of the federal government. In fact, the core agencies that really determine U.S. monetary policy and economic decision-making are: the U.S. Office of the Comptroller of Currency (OCC), the U.S. Federal Reserve System (FED, also known as the “Federal Reserve”), the U.S. Federal Deposit Insurance Corporation (FDIC), The U.S. Depository Supervision Administration (OTS) and the National Credit Union Administration (NCUA).

Frankly speaking, the SEC and CFTC are more like “thugs” on the front line of regulation, and the big guys behind the scenes are actually the five core regulatory agencies mentioned above. Among them, in the currency field, the Office of the Comptroller of the Currency under the U.S. Department of the Treasury is one of the regulatory agencies that has the closest relationship with banks. The National Currency Act of 1863 gave the Office of the Comptroller of Currency to supervise federally registered banks (National Bank). At the same time, it is also mainly responsible for issuing licenses and supervising the National Bank. According to public information on Wikipedia, the specific supervisory functions of the U.S. Office of the Comptroller of Currency include: ensuring the safety and soundness of the National Banking System; approving applications for the establishment of branches and capital changes by regulatory objects; and its violations of laws and regulations or unsteady operations. Take regulatory measures; formulate and issue regulations on bank investment, loans, etc.; and most importantly, ensure that all people have fair and equal access to financial services.

So, when you see the former Acting Administrator of the Office of the Comptroller of the Currency writing in support of DeFi, it is not surprising.

Last Wednesday (January 13), Brian Brooks, the former Acting Administrator of the Office of the Comptroller of the Currency, wrote an article “DeFi-driven “Autonomous Driving Banks” May Realize Inclusive Finance”. He believes that DeFi has reversed everything and uses blockchain technology. DeFi can provide financial services without manual intervention. For example, a money market can be created by using interest rates based on supply and demand algorithms. However, in traditional banks, setting interest rates usually needs to be implemented by a special interest rate committee. Not only that, DeFi also supports decentralized transactions, allows users to complete financial services without a broker, and executes loan contract agreements without the involvement of loan officers or credit committees-through algorithms, depositors can get a very comprehensive Interest rate information, so you can choose to provide the best interest rate financial institution; through software, the financial system can make the most reasonable credit business decision, determine whether it can lend to certain borrowers, and then eliminate the problem of “human discrimination”; “autonomous driving bank” “It can even no longer be managed by people, thereby eliminating the risk of fraud or corruption.

There is no doubt that regulators no longer ignore the existence of DeFi. On the contrary, they are beginning to notice the huge potential of this emerging field. While including it in the scope of supervision, they are also considering how to formulate rules applicable to DeFi. And all of this starts with the “DeFi” boom in the summer of 2020.

2020 DeFi First Spring: Causes of Industry Outbreak and Exchange Layout

Many people call 2020 the “first year of DeFi”, but in fact, the concept of decentralized finance has begun to rise in the cryptocurrency market as early as 2019. It was only last year that it was promoted by Compound’s first “liquid mining”. The outbreak, and this is also the main reason for the first spring of DeFi.

However, although the entire industry is developing at a very rapid rate and showing great potential, the entire industry is still in the early stages of “barbaric” development.

The total lock-up volume (TVL) is one of the most important indicators to measure the scale of the DeFi industry. It is obtained by calculating the total value (USD) of all ETH and various ERC-20 tokens locked in the project’s smart contract. The figure below shows the change trend of the lock-up volume from the beginning of DeFi (2017) to the present. It can be seen that the decentralized financial market has actually experienced a “dormancy period” for three years, during which the lock-up volume has always been low. Struggling, until after Compound distributed COMP governance tokens to users in June 2020, the lock-up amount has not changed significantly, and then it has risen at an alarming rate. (At the time of writing this article, the total DeFi lock-up amount has exceeded 35 billion US dollars. The amount of locked positions exceeds 25.5 billion USD).

Governance tokens represent the governance rights of the community over DeFi projects, which can determine the development direction of the project, and can also capture the benefits of the project itself. Governance token version 1.0 was initiated by Maker, but the MKR token launched by Maker did not introduce the concept of “mining”. In contrast, Compound on behalf of Governance Token Version 2.0 has pushed the DeFi industry to a new level. Users only need Using Compound to deposit or lend assets can get COMP token incentives. As a result, it only took less than a month. Compound lock-up volume soared from US$9 million to US$1.2 billion, and DeFi protocols such as Balancer and Curve were also launched. Governance tokens triggered the “DeFi boom”.

So, why does the DeFi industry have such a “sudden skyrocketing” development trend? In fact, there are two main reasons for the decentralized financial industry to usher in the “first spring” in 2020:

First of all, the entire crypto industry is in a cyclical bear market after 2017. No matter whether it is funds or user traffic, it has not created a better environment for the development of blockchain projects. However, since 2019, the entire cryptocurrency market has begun to recover, and industry practitioners , Investors and project parties are becoming more and more mature, laying a more solid foundation for the distribution of DeFi thick accumulation books. Many DeFi applications have gradually landed, and many non-cryptocurrency users have also begun to use and enjoy the convenience brought by decentralized finance. Then it injected new funds and flows into this emerging field.

Second, the underlying public chain on which DeFi relies has been further developed. Many public chains have previously claimed that they can meet all needs in terms of ecological breadth, but in a certain depth of business needs, their technology or ecological architecture cannot meet the deeper needs of the business. For example, the existing TPS of Ethereum is difficult. Support financial-level applications. However, starting from 2020, the cryptocurrency industry seems to have formed a consensus that a public chain that focuses on the financial sector needs to be built to solve the current DeFi track problems. For example, the public chain KuChain being developed by Kucoin is derived from DeFi and DEX. Starting from the pain points of deep application in the financial field, it aims to fundamentally solve the shackles of DeFi applications.

It is undeniable that exchanges play an important role in the crypto industry. Many resources in the industry are concentrated in exchanges. The first wave of the rise of DeFi provided space for the differentiated development of exchanges. Some leading cryptocurrency exchanges started DeFi. Integrate into its own ecology and future development, and hope to use the advantages of advanced deployment to further consolidate or develop its own core competitiveness. In fact, as far as exchanges are concerned, they not only have the ability and resources to promote the development of the DeFi market, but also need to assume a responsibility. While providing liquidity for DeFi, they must also let more users understand and even participate in the development of DeFi projects. . So, what are the layouts of the top cryptocurrency exchanges during the “first spring” of DeFi?

The second spring of DeFi in 2021: continuous evolution and development, the role of exchanges cannot be ignored

DeFi provides a new asset appreciation channel for cryptocurrency users, completely changing the “only profitable investment” method of holding cryptocurrency and waiting for the price to rise in the past. Now people can use their assets to provide liquidity in DeFi to make money . In addition, effective improvements in user experience, regulatory frameworks, and expansion solutions will also greatly help the development of the DeFi industry——

In terms of user experience, with the further improvement of cross-chain interoperability, DeFi assets or applications will become more abundant, and even support asset interoperability, coupled with the ever-decreasing development threshold and high developer freedom, it is bound to help DeFi in the scene On the one hand, it has achieved a blowout.

In terms of the regulatory framework, as mentioned at the beginning, the U.S. Office of the Comptroller of the Currency has given DeFi a “green light”, and regulators have accepted the emergence of a new business model driven by DeFi technology, and even called for a review of outdated rules.

In terms of expansion solutions, with the smooth launch of Ethereum 2.0 and the launch of the second-tier solution, the current problems of high gas fees and transaction delays encountered in the DeFi market will be greatly improved.

It is expected that in 2021, “traditional” cryptocurrency exchanges may play more roles and assume more responsibilities in the DeFi industry, instead of just listing currency and attracting traffic as in 2020. On the other hand, the rise of decentralized exchanges will also form a new force this year. Decentralized spot trading is a trustless market based on smart contracts. Users can encrypt their Exchange currency into other cryptocurrencies. According to the latest data from DeBank on January 21, the 24-hour trading volume of decentralized exchanges reached 1.2 billion U.S. dollars, and from the perspective of the trading volume trend (as shown in the figure below), the trading volume increased significantly after entering 2021.

So, as DeFi continues to evolve and develop, how will exchanges promote the “Second Spring of DeFi”? We believe that in 2021, cryptocurrency exchanges are expected to play an important role in three aspects: DeFi basic ecology, project “direct investment”, and free public chain.

As mentioned above, the leading cryptocurrency exchanges including Huobi, OKEx, and Kubi are all actively building the DeFi basic ecology. Through deep binding with the project itself, it empowers DeFi projects at the platform function and product level. At the same time, it uses resource advantages to select high-quality DeFi projects for investors. Take KuCoin as an example. The exchange has set up a DeFi project observation area. Various methods such as community voting and Spotlight continue to select high-quality assets worldwide, and have successively mined SNX, AAVE, AMPL, Velo and many other popular users. The encrypted assets that are held by the company provide users with more investment options.

In addition, cryptocurrency exchanges are likely to increase the “direct investment” of DeFi projects in 2021 and participate in project construction. Take Huobi as an example. Its DeFi Labs portfolio already includes DeFi projects such as CoFiX, InsurAce, and PoolTogether. In the future, it will invest in DeFi verticals such as incubating lending, trading, and derivatives. Not only that, Huobi DeFi Labs, MakerDAO, Compound, NEST community, and dYdX also jointly launched the DeFi Alliance to promote the research and development of DeFi, establish common protocols and standards, and promote the development of global cross-border collaboration and ecosystems.

It is worth mentioning that the exchange’s own public chain is expected to become the top priority of the “Second Spring of DeFi” in 2021. At the beginning of 2020, OKEx included DeFi in one of the five ecological construction directions of its own public chain OKChain, and announced that it would build a decentralized exchange OKEx DEX based on OKChain, aiming to attract developers to build a DeFi ecosystem. In addition, KuCoin also launched the public chain KuChain, which focuses on the financial sector, to solve the current problems of DeFi, DEX and other tracks, such as developing LSP (Liquidity Sharing Protocol) to improve DEX liquidity and more intuitively match DeFi application scenarios To accelerate project incubation.

to sum up

From the “direct investment” of DeFi projects, the construction of infrastructure, to the entry of the DeFi track through the original public chain, we found that cryptocurrency exchanges are actively empowering the decentralized financial industry and expanding ecological value. It is undeniable that, from a proportional point of view, the number of DeFi users accounts for only a very small part of the users in the entire encryption industry. At present, its value is still in a depression, so there is still huge room for growth. Global inflation expectations and earnings are declining traditional financial products. It will also promote more mainstream users to choose DeFi.

As Brian Brooks, the former Director of the U.S. Office of the Comptroller of the Currency said, we will usher in a new DeFi future, where we can eliminate errors, stop discrimination, and achieve inclusive finance. Such a future is achievable!

What we have to do now is to prepare for the “Second Spring of DeFi”.