From casinos to Wall Street: Where is the next breakthrough in DeFi?


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DeFi is gradually evolving into CoFi (Computable Finance), and computable finance that can quantify and calculate each financial parameter.

Written by: Sharlyn Wu, Chief Investment Officer of Huobi Group

With Uniswap’s daily trading volume reaching nearly US$1 billion, the automated market maker (AMM) mechanism has also become the backbone of decentralized exchanges. The reason is simple. Considering the existing underlying technology and the cost structure of the blockchain, it is no longer appropriate for market makers to place and cancel orders quickly in the order book mode exchanges as before.

A platform like Uniswap that uses a constant coefficient AMM algorithm is very suitable for long-tail assets. These assets do not require pricing and liquidity support, and the project itself usually needs to provide liquidity for retail investors. However, as I wrote in my previous article, “Why is Uniswap V2 not suitable for use as an oracle? “ I said, Uniswap is not a panacea for all the scenes, can not become applicable to the field of DeFi oracle.

In addition to Uniswap, there are also other platforms that try to optimize the experience of market makers and traders, including Curve, which focuses on stablecoins, and Balancer, which supports multiple asset pools. Unfortunately, none of them can be a universal model for all market maker application scenarios. This is because the first principle of financial product design is that transactions need to be priced at market prices. Otherwise, the product may be continuously arbitraged by speculators. Without proper risk management measures, there will be no rational market participants to participate.

Real market makers are likely to be reluctant to make a market in Uniswap, because they may lose money in the event of market turbulence. For some highly liquid assets, this problem is even more obvious. Because the gap between the price of these assets on Uniswap and the market price may be normal. Real big players will not choose Uniswap, after all, any large-scale transaction may cause extremely high slippage.

The new type of market-making agreement CoFiX will redefine the rules of the game for AMM. The CoFiX protocol introduces a market maker model based on market prices and adopts a fully calculable risk control mechanism. The NEST oracle machine selected by CoFiX provides a set of mathematical proofs for pricing risk. With the help of NEST, CoFiX has designed a fully calculable on-chain market maker protocol to solve the system risk of market makers on DEX.

The main operating rules of CoFiX are:

  1. The CoFiX protocol obtains the market price P from the NEST oracle machine
  2. CoFiX calculates the risk factor K into the market price P. Delay and price fluctuations are the two main price risk factors
  3. With K, CoFiX will generate a new reference price P’, and P’is the price that traders and market makers really refer to

Compared with other existing AMM protocols, the advantages of CoFiX are obvious. It uses the actual market price to eliminate the possibility of systematic arbitrage, and at the same time fully quantifies the risk, so that the “automation” characteristic of the DeFi market is also retained.

One of the biggest shortcomings of the existing AMM agreement is that market makers cannot fully determine how much risk they will bear when providing liquidity. Furthermore, since these agreements do not use actual market prices, market makers cannot accurately hedge their positions on other platforms. Because these AMM mechanisms fundamentally rely on arbitrageurs to approach market prices indefinitely, market makers can only continue to subsidize arbitrageurs.

By directly using market prices, CoFiX gives market makers the opportunity to assess risks and take corresponding hedging measures. The protocol also provides other special risk control mechanisms to solve problems such as network congestion and oracle attacks. CoFiX has completely changed the AMM game, enabling DeFi to truly attract all traders, all market makers and all assets.

We trust banks like Goldman Sachs because of their ability to continue operations. But while giving them this trust, we also lost effective monitoring of the operations of the Goldman Sachs Group, and then assumed the hidden risk of default. Right now, finance is shifting from off-chain to on-chain, and the information asymmetry between “Goldman Sachs” and us has also been broken. We can now monitor all asset information just like the “banker” on the chain.

In addition to information symmetry, DeFi also brings complete computability. In the traditional financial system, we can never predict when Lehman Brothers will go bankrupt or when a P2P lending company will take away users’ money. Even the geniuses of long-term capital management companies can create sound financial models, but they cannot accurately calculate the probability of default on Russian debt.

Because of DeFi, for the first time in history, we can create a financial system that can run automatically without human intervention, and accurately calculate the risk-reward structure behind all assets and transactions, which has also completely changed the financial game.

However, only a complete agreement can make a lot of money in the DeFi field. When financial institutions need to invest millions or even billions of dollars in DeFi transactions or loan agreements, they are not willing to bear the pricing risk from one person or a small group of people. Without proper risk management, they will not invest funds into the DeFi agreement.

Although projects such as Uniswap have laid a solid foundation for DeFi and attracted more than 100,000 users, for DeFi to formally enter Wall Street from a “casino”, we need to give full play to the mathematical determination in the era of decentralized finance. These characteristics of performance and computability.

Therefore, we see that DeFi is gradually evolving into CoFi (Computable Finance), and computable finance that can quantify and calculate each financial parameter. In other words, only reasonable chain pricing, professional financial products, and solid risk management can lay a good foundation for DeFi 2.0. CoFiX has taken an important step in this right general direction.

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