DeFi evolution history: Will the blockchain financial market usher in a Cambrian explosion?

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In the past few months, the DeFi market has been performing a rollercoaster-like dream story.

First, the skyrocketed without looking back, relying on the innovative model of liquid mining to stimulate the nerves of every new and old leek, everyone in the circle marveled at the new bull market bred by the industry;

After that, it plunged for many days. Many people were trapped in the high-pitched leeks, and became contemporary thinkers and critics. They began to think about the DeFi bubble and criticized the DeFi craze as just a money-playing game of drumming and spreading flowers;

noise, noise, noise.

In fact, if you only focus on the short-term currency price rise and fall, then how exciting the surprise of the rise and how painful the fall will be. Investors should really see clearly what is the fundamental factor driving this wave of DeFi boom? What is the positive significance of this wave of DeFi boom to the industry?

In the following pages, we will discuss each issue one by one.

01

In my opinion, the fundamental reason for this wave of DeFi boom is that the liquidity mining model innovatively empowers the wealth effect of the secondary market of encrypted assets to the DeFi primary innovative market.

In the three years from 2017 to 2020, many DeFi projects, including MakerDAO, Compound, Aave, etc., have opened the exploration of the application of blockchain technology in the financial industry. Their vision is to build a decentralized bank in the crypto world, where users can mortgage crypto assets to obtain financial interest, and they can also pay interest to borrow crypto assets.

However, after nearly three years of development, the DeFi market has only accumulated $1 billion in encrypted asset lock-up (TVL). The reason is that this kind of borrowing demand is only limited to the hoarding demand of mining miners, and the usage scenarios are very limited. , The audience has always been very small, and the entire DeFi market is therefore tepid.

In order to attract more users to lend, on June 17 this year, the top lending platform Compound issued a governance token COMP. As long as users participate in lending, they can get COMP token incentives to attract new users.

Surprisingly, this coin, which was originally issued out of thin air similar to points, soared by 20 times. Not only did the market value of Compound let many people taste surpassing MakerDAO to become a new DeFi brother, but also let many retail investors taste the DeFi nuggets. Sweetness.

Soon, the secondary market, which was extremely scarce of hype, discovered the gold-absorbing effect of DeFi. As a result, more and more high-quality DeFi projects began to plan to issue coins, more and more exchanges began to grab DeFi currencies, and more and more users began to ambush to participate in DeFi investment. In this way, the DeFi liquidity mining boom began to take shape.

Compared with the story-telling investment and financing model of the 2017 Esio white paper, the DeFi lending platform has visible asset lock-ups, open source contract codes, and a healthy operating model. In the eyes of many people, investing in DeFi platform tokens It is equivalent to investing in the stocks of the giant crocodile of the future blockchain financial platform, which is much more reliable than the project launched by Esio. There are even people calling for it. The DeFi tokens, which are still in their 30s and 40s, will surely replace Litecoin (LTC), Ripple (XRP), Bitcoin Cash (BCH), etc. in the future.

After all, if the market value is also obtained by telling stories, I would rather believe that the leeks are now visible and tangible.

02

After borrowing the wealth effect of the secondary market, we were surprised to find that the innovative singularity of the DeFi primary market has also been opened. With the help of hot money, DeFi products have also begun to evolve step by step.

First, Andre, a talented engineer from Wall Street financial institutions, innovatively created the DeFi aggregator platform yearn.finance. Andre found that the fundamental reason for the lack of users on platforms such as Compound is that the income of the interest rate market is too low, and everyone is afraid of a large number of liquidations caused by the plummet of the mainstream mortgage asset ETH. Therefore, why not make a stable currency as the entrance, and can be based on different What about the wealth management platform that automatically adjusts the position of the DeFi product interest rate?

On the one hand, this micro-innovation solves the problem that big funds are afraid of poor DeFi market stability. On the other hand, it does help the underlying compound, Aave and other lending platforms to aggregate a large amount of traffic and funds. In addition, the price of yearn.finance governance token YFI (big uncle) has also surpassed Bitcoin in a short time, allowing everyone to see the power of DeFi innovation.

It should be said that the emergence of yearn.finance is definitely the turning point of a milestone in the history of DeFi. Since then, the DeFi series of products have evolved wildly.

There has been, AMPL, a currency experiment that flexibly supplies the total amount of tokens based on market value, and YAM, a financial aggregation platform that integrates AMPL+YFI, and then there has also been a vampire platform like Sushiswap that borrows other wives to give birth to children. This has also made Uniswap, the number one DEX in the universe that makes Coinbase, Binance and other centralized exchanges sleepless.

Moreover, this epic opportunity for scalloped wool was quickly copied to TRON, EOS ecology. They opened an amusement park belonging to the dicks outside of the giant whale battlefield where Ethereum mining was conducted. All kinds of fruits and vegetables, rare treasures, are all online.

If it is said that the emergence of YFI opened a new era of DeFi innovation, then YAM+Sushiswap, including Uniswap’s forced issuance of coins, all intensified the bubble in the DeFi market without exception.

The evolution of this wave of DeFi craze is essentially the financial model innovation made to allow the blockchain financial scene to have a broader flow and market foundation. Putting aside the anxiety caused by the excessive expansion of secondary market sentiment, such as hype and bubbles, objectively, what are the far-reaching and positive effects of this wave of DeFi boom?

03

DeFi maintains the stability of the entire crypto asset market

Some people say that the DeFi currency keeps rising and falling three to five times a day, how can it stabilize? We have to be clear that many DeFi currencies have a small circulation, and a small amount of capital can cause sharp rises and falls. In the short term, the rise and fall of DeFi coins is of little significance. Whether the market is stable or not depends on the performance of mainstream cryptocurrencies. We have noticed that since the outbreak of the Black Swan Incident on March 12 this year, mainstream currencies such as Dabing and Ethereum have felt like sitting still on the purple lotus. Recall that in the half a year before 312, the entire encrypted asset market was constantly pinning up and down, and everyone was panicking. After this wave of DeFi boom, the mainstream market was obviously too stable.

the reason is simple:

1) A large amount of funds for malicious control and speculation have been transferred to the DeFi market. Compared with the mainstream market, DeFi with a smaller circulating disk is easier to control at low cost;

2) DeFi market liquidity mining has locked up most of the funds. This time Uniswap is doing liquidity mining, and WBTC lockup has increased by more than 100,000. The popularity of DeFi has allowed mainstream crypto assets such as Ethereum and Bitcoin to circulate The market becomes more stable;

3) The biggest crisis in the DeFi market is that the price of its mortgage assets fluctuates sharply. This is similar to the financial subprime crisis, causing a large number of platforms to face a liquidation crisis. Coupled with the overlap of DeFi assets, it is easy to induce a collapse.

04

DeFi leads the blockchain financial market to usher in the Cambrian explosion

Many people think that this DeFi liquidity mining is the same as the EOS gambling boom at the end of 2018, and it will not escape the short-lived fate. In my opinion, DeFi liquidity mining is only the beginning of blockchain financial innovation, and more innovative and dynamic financial gameplay will emerge.

why would you say so?

1) DeFi’s composable Lego building block model can accommodate innovation in a lower cost and more diverse way. The current popular model is aggregation + financial management. It is foreseeable that aggregation + insurance, aggregation + games, etc. And so on will follow, creating more ways and possibilities for the market;

2) This wave of enthusiasm strips off the hype component, and many underlying innovations are remarkable: AMPL’s automatic inflation rebase mechanism is an innovation to the Bitcoin currency experiment; Uniswap trading algorithm pool is a matching trading mechanism for traditional order books An innovation; YFI aggregator’s no private equity and no pre-mining mechanism is an innovation in the investment and financing model, etc.;

3) Elite talents and institutional funds from traditional financial circles are running into the market. No matter how fancy the model innovation is, our greatest confidence in an industry depends on how much capital and talent it attracts. Since YFI’s uncle became popular, these people who came to the Ethereum public chain as DeFi developers have also had strong qualifications, and more and more traditional financial talents have joined the industry. And as the lending market becomes more stable after the stable currency, large institutional funds will also enter the crypto world.

05

DeFi ushered in a new era of stablecoin mining and financial management

We traditionally invest in computer computing power, and POW is defined as the era of hardware mining 1.0, then pledged cryptocurrency for wealth management mining should belong to the era of software mining 2.0.

Mining in the 1.0 era should be based on the consumption of electricity and energy for the normal operation of the encrypted ecological infrastructure. In the 2.0 era, mining no longer consumes energy. While building the system to operate, it is necessary to challenge how to popularize the encrypted ecology to more Industry, application into more scenarios, attract more people to participate.

Why is this wave of DeFi possible?

1) Yearn.finance acts as a stablecoin aggregator to introduce more stable institutional assets into the crypto market, adding a stable background to the DeFi market and highlighting the financial management characteristics of the DeFi market. In the future, the DeFi market will gradually evolve into a stable currency market, and the market value of stable currency may one day exceed the total asset value of the crypto market.

2) After the speculative nature is stripped away, the market’s steady financial demand will truly develop, and the formation of the stable currency financial market will directly lead DeFi out of the circle. At that time, not only some traditional ETF foundations will find a suitable way to enter, but even the DCEP promoted by the central bank and the digital currency led by various countries may also find a way to integrate with the encrypted asset market. At that time, there will be appropriate solutions for the compliance and regulation of the crypto market. This is the real future for our generation to see the crypto market.

3) The stable currency wealth management market can reduce the current leverage ratio of mortgage lending and apply the credit mechanism to the field of encrypted assets, which may bring fixed assets such as off-chain real estate into the DeFi industry, expanding more possibilities and opportunities for the blockchain financial field imagination.

06

As you can see, the DeFi market is still evolving.

It is only a matter of time in my opinion whether it will be further demonized or gradually become rational. Time will precipitate some valuable products, will gift more meaningful innovations, and of course will eliminate those noisy disruptors. So, for friends who are not familiar with the DeFi industry, how to correctly invest in DeFi value currencies?

My suggestion is to find the underlying value currency and stay away from air currency.

In terms of liquidity mining, the underlying value currency is a series of value currencies supported by the underlying borrowing demand scenario supported by the DeFi aggregator. For example, ETH (at the bottom of the public chain, DeFi products must use ETH as the gas transaction fee), SNX (synthetic asset solution that realizes the bridging of multiple assets), LEND (there is a healthy deposit and loan demand, and the scale of funds grows rapidly), LINK (leading decentralized oracle project), NXM (leading decentralized insurance project), etc. With the emergence of more and more innovative DeFi products, the value of these projects in the DeFi ecosystem is becoming more and more prominent. To be more optimistic, the market value of these projects is likely to rush into the top 20 of the cryptocurrency market by market value in the next one or two years. Space can be expected.

Which air coins should you stay away from? Simply put, it is a new currency issued out of thin air without value support. After the wealth effect of YFI, a large number of governance tokens such as YAM and Sushi have appeared in the market. Many users can make great profits without thinking of mining and selling. However, these money are essentially money earned from the secondary market based on cognitive asymmetry. When the leeks in the secondary market are cut and the price of the governance currency cannot be effectively supported, those who inject liquidity into the market are mining The mine people will leave sooner or later. Therefore, the over-hyped governance currencies are destined to be short-lived ghosts. How to maintain and stabilize the market value and continue to consolidate the community consensus is the real difficulty of the market.

As far as investment is concerned, this type of air currency, unless you have super cognition and mature investment decision-making ability, don’t touch it.

The pessimistic thing is that because the circulation is small and easy to be manipulated, if you choose DeFi to invest, you have to endure the normal state of the early currency price spikes in the DeFi market. What is optimistic is that the mood swings caused by price rises and falls are just meaningless emotional internal friction. Time will prove that this wave of DeFi craze is likely to bring about a super bull market comparable to 2017.

The DeFi world is like Lego bricks. If you recognize its growth space, the investment will find its foundation.