Is the fanatical DeFi just the next ICO? A brief analysis of the value and risk of the DeFi movement


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Only DeFi projects with real business and technical level can surpass the present and grow, surpassing the ICO tokens since 2017.

Original title: “Is the DEFI movement the next ICO boom?” 》
Written by: Vanessa Cao

DeFi (Decentralized Finance) is rapidly becoming a product distribution channel in the field of financial technology . In fact, the DeFi industry itself can be boiled down to a channel for the distribution of financial products. From 1999 to early 2000, the explosion of Internet information made the cost of publishing and acquiring content close to zero. However, in the global financial sector, the distribution cost of creating financial products for everyone is not close to zero.

This opened the Pandora’s Box of DeFi.

DeFi causes the price of Ethereum to skyrocket

As the United States will take long-term near-zero interest rate measures in the next ten years to promote dollar-based assets and financial markets , we are in the stage of asset price quasi-bubble, and the outbreak of a global epidemic (Covid19) and weak economic inflation The economic downturn brought about by the rate has forced the US government to maintain its current state. The People’s Bank of China warned that long-term ultra-low interest rates in certain economies are accumulating financial stability risks and causing spillover effects to other countries. The People’s Bank of China stated in its quarterly monetary policy report that “because the inflation rate of advanced economies has been below the target for a long time, the low interest rates implemented by advanced economies have not yet achieved the desired effect.” It pointed out that low interest rates can hardly change these. The structural problems of the economy, in some cases, have worsened bank profits and caused credit crunch effects. So, are we in the DeFi bubble and the bubble that prevails in the global economy?

Even if there may be a bubble in the DeFi industry, the entire crypto community continues to attract the attention of crypto traders and mainstream media, as well as developers and industry founders. After the compound project entered the industry knowledge and awareness for the first time, different applications have become the focus of attention. The entire crypto industry still believes that the biggest problem is symbolic valuation and participants’ lack of understanding of its risks. These risks occurred this year when hackers abused DeFi products and discovered technical vulnerabilities and weaknesses in order to steal from their platforms. In the past June and April, a hacker stole approximately US$500,000 and US$25 million from DeFi Service Balancer and Dforce respectively. However, the community ignored the risks involved and the DeFi industry continued to move forward smoothly.

The interest in DeFi arose from the growth of the compound lending platform’s launch of its Comp token. It is also unanimously recognized that the industry is promoting decentralized loan services and “Yield-farming.” In the past year, DeFi’s popularity and investor interest have been soaring. According to data from the Ethereum (ETH) analysis platform Dune Analytics (Figure 1), the total number of DeFi users is expected to reach 600,000 by June 2020. The following shows the change in ETH price during the year-to-date (12/31/19–08/31/20) period, calculated in USD%. Except for the March lows caused by the global market chain reaction, the price change of the US dollar against ETH has been within a range. This can be inferred to mean that the supply of ETH on the open market may enter the Stacking and DeFi platforms, and is unlikely to be short-term and day trading. Due to the DeFi platform, the change in ETH% also means that there is more demand to own it.

Figure 1, Data from Dune Analystics

Compared with the initial coin offering (ICO) boom and phenomenon in 2017, decentralized finance (DeFi) tokens have brought huge capital gains in USD. In (Figure 2), some sparse data sets are shown and some views on the scale of US dollar participation in ICO financing are given. The EOS project is the largest ICO financing at 4.2 billion US dollars. The relative market value of DeFi is approximately US$15 billion, of which approximately US$9 billion is locked. As of November 2019, the ICO project has raised $25 billion since its establishment. Interestingly, DeFi is an industry movement in the last year, and the ICO industry scenario was launched sometime in 2017.

Is the fanatical DeFi just the next ICO? A brief analysis of the value and risk of the DeFi movementFigure 2, Data From CoinMarketCap

The 2017 ICO scene witnessed hundreds of token issuances, most of which were issued through the Ethereum blockchain. Approximately 435 ICO projects were “listed” with an average financing of approximately US$12.7 million, for a total of US$5.6 billion . The National Broadcasting Corporation Financial Channel (CNBC) once reported that: “ICO as an early-stage project financing channel has exceeded the maximum amount of venture capital fund investment.” Laws and regulatory agencies supervise the public offering of ICOs. In February 2019, the U.S. Securities and Exchange Commission (SEC) will formulate guidelines to enforce enforcement of ICO projects that violate securities laws.

The ICO phenomenon and DeFi products have enabled investors to experience capital appreciation of assets, such as Compound’s Comp Governance Token, and through actual use of DeFi, that is, “Yield Farming”. So far, the total TVL assets locked in various DeFi platforms have increased from approximately US$1.1 billion to US$9.2 billion (Figure 2). In addition to the leading MakerDao, in the first few days after its launch in mid-June this year, Compound’s COMP governance token received nearly 5 times the revenue and locked up a $763 million DeFi platform. Since the end of May, a project of AAVE’s Lend Token agreement has obtained more than 6 times the income and locked in 1.2 billion US dollars. Since the end of May, another project called Synthetix s SNX Token has also achieved a growth of more than 5 times, locking in US$833 million. See (Figure 3). It can be seen from the figure that, within a one-year time frame, the price increase of the more popular DeFi-related tokens exceeds that of the general financial index, such as SP500. Despite the rapid increase in the price of “FAANG” stocks, the price increase of tokens such as Tesla and DeFi still leads. The surge in DeFi projects and investments is one of the many reasons why Ethereum (ETH) continues to rise, from the price range of USD 225 on June 30 to close to USD 500 (September 1, 2020) (Figure 4), estimated An increase of about 70%. DeFi represents the best use case of Ethereum so far, and has driven the growth of network usage so far in 2020 (Figure 5).

Is the fanatical DeFi just the next ICO? A brief analysis of the value and risk of the DeFi movementFigure 3, Data from BTX Capital

Is the fanatical DeFi just the next ICO? A brief analysis of the value and risk of the DeFi movementFigure 4, Data from BTX Capital

Is the fanatical DeFi just the next ICO? A brief analysis of the value and risk of the DeFi movementFigure 5, Data from BTX Capital

“Interesting” project party

According to reports, before the Curve team verified the deployment, anonymous developers created smart contracts, and about 80,000 CRV tokens (about 5 million US dollars) were pre-mined. The Curve team members were initially “skeptical,” but eventually discovered that the deployment had “correct code, data, and management keys.” Interestingly, the Curve project continues to operate as usual, and it seems that the project team has accepted this “pre-mined” result.

“Due to the increasing popularity of tokens and DAOs, we had to adopt them,” Curve said, adding: “The tokens will eventually be issued as planned.” The DeFi industry’s early expectations for Curve’s Dao and CRV tokens Dig is skeptical and worried about fraud. The permissionless blockchain network means that any developer can deploy smart contract code. Various cryptocurrency exchanges such as Binance, OKEx and Poloniex have supported the launch of CRV Token.

DeFi projects involve technical risks, such as YAM Finance, which is an experiential decentralized financial agreement. On August 13, 2020, the price of the Yam token dropped to zero within a few minutes. The market value of YAM plummeted, resulting in a sudden increase in the price volatility of all major tokens (such as Compound, Zone Finance, and Balancer). Yam co-founder Brock Elmore revealed on Twitter that there is a fatal technical flaw in the agreement of their project, namely the Rebase supply function of the Yam token. This technical defect has caused problems with the governance system of the protocol, because after the initial rebase, more YAM tokens will be generated than expected. YAM has invested heavily in Compound, Aave loan, Chainlink Link, Wrapped ETH, YFI, Synthetix, Maker and Uniswap V2 LP tokens. When multiple token projects are bundled together during the betting process, the systemic risk of the DeFi market is also an area of ​​concern.

Supervision not yet

DeFi will eventually attract the attention of regulators and put more supervision on the industry. There will inevitably be tricky legal issues and regulatory reviews. For example, Synthetix will provide stock-like tokens for Tesla and Apple stocks, which may raise some legal issues. The enforcement of the US Securities and Exchange Commission put an end to ICOs and established more legal supervision in other countries. Given the legal precedent for ICOs, DeFi investors should exercise caution when seeking such investment opportunities. Further discussions and in-depth legal analysis are needed to identify DeFi projects with platform security best practices, financial token design and appropriate legal structures in a self-regulatory approach. Legal professionals are also needed to help determine which regulatory agencies need to be involved. DeFi provides funding for lobbyists and other initiatives that will try to defend and educate these cryptocurrency-based technologies and ultimately achieve real-world benefits.

Today’s DeFi tokens follow some themes that have helped them continue to gain attention. The most popular themes of the DeFi project start are: lending agreements and derivative platforms on the chain. Project evaluations on these topics have repetitive simple benefits and characteristics . Relatively easily, new DeFi products and services can be traded through the cryptocurrency market and traded to exchanges, which has caused some alarms about the formation of asset bubbles.

The DeFi market without any restrictions or supervision can create innovation and growth for newly established financial technology applications. The Yield Farming practice of the DeFi project decentralized financial investment channels by removing the intermediaries of the financial world and banks. DeFi projects can be created and listed on decentralized exchanges such as Uniswap, with almost no entry barriers or frictions. However, when a DeFi project lists a useless annual rate of return of 10%, and the price fluctuates drastically, the bubble is actually increasing inadvertently.

Vitalik Buterin: “To be honest, I think we are emphasizing flashy things. DeFi gives you too many high interest rates. These high interest rates are obviously higher than what you can get in traditional finance. They are essentially temporary arbitrage opportunities. , Or accompanied by unannounced risks.”

The future of DeFi

On the contrary, DeFi network protocols are being widely used. Among them, they do have a certain functional mechanism that can give them evaluation and use value. For users who do not follow the cryptocurrency industry or stock investors on Roinhood, DeFi does not seem to be very interesting. They have learned profound lessons from their past investments in ICO tokens. Due to its complex technical structure, DeFi projects are very likely to suffer from high volatility and sudden price drops. In essence, only DeFi projects with real business and technical level can surpass the present and grow, surpassing the ICO tokens since 2017. The well-thought-out DeFi project may still not attract ordinary investors to purchase its tokens, and will restrict unqualified investors due to regional regulatory issues. Finally, the DeFi agreement project that creates real-world economic value will flourish and become an industry leader . Projects that are only for speculators to reuse and trade arbitrage profits will achieve short-term financial success. We should be satisfied with this fact. If the DeFi industry continues and has digested the high-yield bubble, then future token price fluctuations and market repair adjustments will strengthen the wider use and acceptance of DeFi.

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