DeFi can’t stop! Ethereum’s financial “building” is gradually taking shape


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Friends who have entered the circle early in DeFi must still have a deep memory of the period when the public chain was flying in the sky from 17-18. Compared with Ethereum with a TPS of only 15, it seems that every emerging public chain looks so beautiful. It is “Ethereum.” Killer”.

Nowadays, the old batch of “Ethereum killers” has disappeared from people’s memory, and the new generation of public chains have identified themselves as “Ethereum friends”, trying to find a different way to break through.

No way, the ecology of Ethereum is already too perfect, especially after the popularity of DeFi this year, more and more concepts in the traditional financial circle have been copied to ETH, and there have been “decentralized versions” based on ETH. On many other public chains, you can’t even find something that can barely be called an “asset”, let alone what DeFi infrastructure is. The strengthening of this positive spiral effect has made Ethereum enter a stage where the strong will become strong, and the gap between it and other public chains is getting bigger and bigger. Except for Polkadot created by Gavin, one of the creators of Ethereum, and Near, who himself admitted to be threatened, other public chains may not even threaten the ability of Ethereum at all.

The popularity of DeFi has the advantage that it has allowed Ethereum to establish its future direction, or even the breakthrough and development direction of the entire blockchain industry in recent years, that is, to be the underlying platform of decentralized finance and realize that Internet finance wants to achieve but has not The “inclusive finance” that can be achieved also allows many blockchain users to truly feel the users and charm of the blockchain.

There is also a downside to the popularity of DeFi, that is, the blockchain industry, which has a high barriers to entry, has entered the DeFi stage and has a few more bricks at the door.

Originally understood a little bit of economics, computer networks, game theory, and how much you can understand Bitcoin. Now you have to understand various DeFi projects on Ethereum. You also have to understand various financial terms and concepts. Common borrowings in life, interest rates, futures, options, advanced derivatives projects, such as CDP (collateralized debt position), ABS (asset securitization), CDO (collateralized debt-risk grade product), volatility Rates and so on. You may have only watched it before, but never thought about what it is, or something that you have never heard of, so this wave of DeFi fever, many players who eat big meat, are often blockchains Some advanced players who are both proficient in finance.

Grandpa Mao said that if you fall behind, you will be beaten. The DeFi market has been launched for half a year. The recent big rebound is also obvious. AAVE, Uni, YFI and other DeFi leaders rebounded fastest. Big money is focused on these DeFi Blue Chips (blue chips). At this time, if you still “sniff” or “are too lazy to understand” DeFi, I am afraid that the next wave of bull market will still have little to do with you.

This article will mainly introduce the current DeFi innovation in the blockchain field from a financial perspective. Of course, many “so-called innovations” are often just “re-engravings” on the blockchain on Wall Street, but as long as the re-engraving is good, the blockchain can be one step closer to our lives. It is also worthy of appreciation. of.


The current DeFi foundation

MakerDAO, stablecoin

DeFi is no exaggeration to say that the current Ethereum ecosystem, if there is no MakerDAO, there may not be DeFi.

MakerDAO is a perfect reproduction of the “central bank” in reality. A more strict definition should be the re-enactment of the central bank in the old currency gold standard era before the collapse of the Bretton Woods system.

In case there are readers who are not familiar with the Bretton Woods system, here is a little introduction. The Bretton Woods system refers to the international monetary system centered on the US dollar after World War II. Simply put, the US dollar is linked to gold, and other currencies are linked to the US dollar.

In this system, the U.S. dollar can be exchanged for gold according to a fixed ratio, that is, the gold standard system-this is also the earliest monetary system implemented by the central banks of many capitalist countries in Europe and America.

The gold standard allows gold to have all the functions of currency, but with the growth of gold production, the imbalance of stock distribution, the First World War and other reasons, it gradually collapsed after a hundred years. The Bretton Woods system is the last era of the gold standard. It has basically decoupled from gold, and has generally entered an era of currency devaluation and inflation.

Friends who have used MakerDAO should know that the stablecoin DAI can be minted by over-collateralizing ETH in the system, and can choose to redeem it in the future (about redemption, MakerDAO has a detailed liquidation system, the reason for the length is not shown here, interested Readers can refer to it by themselves). In this system, ETH is gold and DAI is US dollars.

With stablecoins, DeFi has the basis for some financial activities such as mortgages, borrowings, derivatives, and mining.

This is why stablecoins are called the “Holy Grail of Cryptocurrency”.

In addition to the stablecoins issued (minted) by MakerDAO in this “gold standard” way, the DeFi world also has many explorations about stablecoins. Aside from USDT and USDC’s “not so blockchain” mapping stablecoins, But the blockchain is native, there are over-collateralized SUSD similar to MakerDAO such as QIAN, SNX, and Lien’s tiered bond model (to be discussed later) and a stablecoin based on the algorithm of the blockchain. Terra, RSR, AMPL are the main ones. Here is also a brief introduction:

Terra and RSR are somewhat similar. Both are realized by a basket of currencies as a reserve pool + dual Token form. One is a stable currency with the goal of anchoring the US dollar, and the other is arbitrage by the market maker, additional issuance and destruction of the reserve pool, and PoS income. To adjust the value of stablecoins and equity tokens, everyone buys and sells in the trading platform, usually this adjustment and equity Token, RSR is called RSR, Terra is called Luna.

Needless to say, AMPL should be familiar to everyone. It used a very simple and rude method of adjusting the supply according to the currency price. After that, countless imitation disks appeared. On the basis of AMPL, similar treasury, destruction, tax rates, etc. Micro-innovation to increase complexity, but in terms of market value and influence, AMPL is already the leader of this subdivision track.


The core of DeFi

Borrowing (Compound, AAVE)

If DeFi is said that stablecoins are the foundation of DeFi, the core of DeFi is undoubtedly borrowing. After all, in the traditional financial field, borrowing these two words almost occupies half of the financial market.

If MakerDAO is regarded as a decentralized version of the central bank, Compouond and AAVE are undoubtedly decentralized versions of commercial banks. While absorbing deposits and lending, they earn this interest differential.

Compound’s business model is well understood, and the one worth mentioning here is AAVE (Lend), because its most well-known business is actually a “lightning loan” that is native to the blockchain and issues and obtains loans without intermediaries. The main user target of this business is not borrowers, but traders doing arbitrage transactions. For example, users can obtain loans from the Aave agreement, and then quickly arbitrage between the DeFi platform and the trading platform.

Understanding Lightning Loans is of great significance to understanding the blockchain and DeFi. Lightning loans are a native product of the blockchain that does not exist in traditional finance. Several important DeFi security incidents this year are almost all related to Lightning Loans. . Regarding the topic of flash loans, you can write a separate article. I will only put a brief introduction here. Interested readers are strongly recommended to search for related articles, especially the security topics related to flash loans this year.

“Lightning loan is to complete borrowing and repayment in a chain transaction without collateral. Since a chain transaction can contain multiple operations, developers can add other chain operations between borrowing and repayment, making this There is a lot of room for imagination in the borrowing, allowing more developers to use flash loans to create refinancing tools or arbitrage tools and build financial products without capital.”


Primary derivatives


When DeFi mentions ETH derivatives, the first thing you think of is SNX.

SNX is also well understood. It is a synthetic asset protocol that maps encrypted assets, stocks, currencies, precious metals and other types of assets into ERC-20 Token forms through SNX’s over-collateralization. Of course, these synthetic assets just copy the price of the asset, and do not include all other properties of the asset. Also only trade on Synthetix.Exchange.

SNX provides the crypto world with an opportunity to trade stocks or commodities such as gold and silver, and because traders do not buy and sell real digital or physical assets, it has no impact on those markets. Even without an order book, traders do not trade with any specific counterparty, but with a decentralized collateral pool.

It can be said that SNX opened the way for ETH derivatives. As a pioneer, its model is relatively easy to understand. SNX’s Token model is more controversial. Because all assets are generated using SNX collateral, they are hailed by insiders as “pull their own hair to the sky”. People who like it think this is the best way to empower Token, and those who oppose it think it is too risky. However, from the current point of view, due to the 7 times ultra-high mortgage rate and relatively complete liquidation mechanism, SNX has not experienced any systemic risks. Of course, this is also related to the lack of time to accept the test.

After SNX, the derivatives that appeared later slowly began to move toward higher levels. The next few derivatives projects introduced, compared to SNX, are directly more difficult to understand.


Advanced financial business or derivatives

MFT, Lien,, BarnBridge, Hegic+YFI

DeFi may be able to write a separate article for each development, so due to space limitations, we can only briefly introduce the idea of ​​the project here. Interested readers have to find some financial knowledge or terminology involved. Find information.

1. MFT-fixed interest rate borrowing

If you go to AAVE or Compound to borrow, you will find that interest rates fluctuate and often change greatly. Of course, this is related to the price and capital of the cryptocurrency market.

However, this is like you go to a bank to deposit or borrow money. The bank only gives you a floating interest rate option, not a fixed interest rate option. For a financial market, this is very imperfect.

Recently, several projects have begun to do this new business with fixed interest rates. Among them, Mainframe is regarded as a star product, and it is also a halfway transformation of DeFi.

How is the fixed interest rate realized? It is in the form of bonds. By using a bond-like tool, it represents an on-chain obligation to settle on a specific future date. In this way, the purchase and sale of tokenized debt can realize the loan of fixed interest rate.

2. Lien-options and stable coins realized by graded bonds

Lien is also playing with bonds and wants to make a “better MakerDAO”.

In Lien’s view, Makerdao’s 150% over-collateralization was achieved by sacrificing the efficiency of capital use. How to achieve 100% efficiency of capital? It can be done through risk-graded bonds.

To put it simply, Lien uses the difference in risk aversion of different groups of people to split an ETH into two commodities, one is a high-risk and high-yield LBT (liquid bond), which carries investment value, and the other is SBT (solid Bonds), which carry stable value, and then use SBT, a very stable synthetic asset, to cast a stable currency iDOL (DAI), and there is no over-collateralization.

For example: at the time of the ETH split, the price of ETH on that day was $400. By splitting ETH, A generates LBT equivalent to US$200 and SBT equivalent to US$200, and at the same time sets the expiration date of SBT to one month, and then obtains 400iDOL stablecoins by selling LBT + mortgage SBT, without over-collateralization at all. A borrows more stable coins through the same fund mortgage.

One month later, the price of ETH became $500. If B buys LBT, he can get 500-200=300 dollars. If the price of ETH is only $300 on the expiry date, then B’s LBT can only get $100 (300-200), because the value of SBT must be guaranteed first.

It can be seen that when the market is good, LBT buyers make more money. Of course, they lose more money when the market goes down. SBT can maintain a stable value because it has the right of first liquidation. So some people say that LBT is a call option for ETH.

Of course, this mechanism seems elegant, but in fact it heavily depends on the depth of the LBT market and the number of users, which determines the stability of IDOL.

3. version of CDS

To understand this project, you must first understand what NXM, NFT, and CDS are.

“Credit default swap (CDS), that is, credit default swap, also known as credit default swap, is one of the most important credit risk mitigation tools for over-the-counter transactions. It is a financial derivative product. One of the credit derivatives.”

NXM-the first and most well-known insurance project on the blockchain (but requires KYC), the concept of NFT non-homogeneous Token has been discussed many times in our previous articles, readers who are not clear click on the blue font to view it. may seem like an NXM that does not require KYC at first, but it is actually a combination of DeFi insurance and NFT, or in other words, it uses NFT to distinguish the type, duration and amount of insurance, and it can be done in opensea. Convenient trading on the platform-this kind of tradable insurance policy is essentially a CDS dressed in an NFT coat.

4. BarnBridge-ABS (asset securitization), CDO (risk classification) and volatility

For the specific introduction of the BarnBridge project, we can see the introduction made by the project party in an AMA.

Q1: What kind of project is Barnbridge, and what problem does it ultimately want to solve?

We will embody the volatility of prices into tokens. BarnBridge will be the first protocol to tokenize volatility. Before the advent of smart contract technology, it was almost impossible to decentralize, track transparently and structure revenue to provide hedging against any fluctuations. In theory, any market-driven volatility can be used to construct derivative products to hedge various risks. Examples include interest rate sensitivity, fluctuations in the underlying market price, fluctuations in market forecast probability, fluctuations in mortgage default rates, fluctuations in commodity prices, and so on. Traditional finance can use a large number of derivatives to hedge risks, and it is time for DeFi to have its own volatility management products.

The smart income bonds and smart Alpha bonds in the project involve the concepts of ABS and CDO. Interested readers can search for these two concepts and go to their white paper to see how to implement them.

5. Hegic+YFI

Hegic has always been doing on-chain options projects before, but the reputation and popularity are not as good as OPYN, the option boss.

Simply put, you can understand OYPN’s options as order book options, while Hegic is an AMM version of options.

However, recently a Twitter of the “God of DeFi” AC made Hegic angry. The reason was that AC stated that he had discussed some ideas in detail with the boss of Hegic, and both thought it was feasible and planned to cooperate!

To put it simply, the current YFI strategies are focused on lossless strategies, but this is not conducive to the profitability of the capital pool. In the future, Hegic’s option strategy can be used to help YFI gain more income.

To be more specific, according to one of my DeFi expert friends, it is like this:

Andre implemented an option plan based on hegic code logic and the underlying crv dai;

This is equivalent to the prototype of a universal option solution for any UNI currency pair;

Hegic goes from 0 to 1, this scheme can be 1 to 100;

Hegic options are limited to WBTC and ETH. It is speculated that the result of Andre’s chat with the boss of Hegic is a set of common logic codes, but the underlying use of Hegic, like a conditional token similar to the general election, can be traded and circulated outside of Hegic;

I don’t know the specific implementation yet, so I have to wait for Andre to post;

If it is realized, theoretically speaking, many small coins on Uni can use Hegic’s options to go long and short.

There are also many new and varied DeFi products that have appeared in front of us in recent times, such as AC’s new project Kp3r, a project NFY that transforms LP Token into NFT… New concepts are emerging in endlessly, if you want to be in the world of blockchain You have to keep learning even if you just want to lose money. No way, who made us a new industry?