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Definition of DeFi
The significance of DeFi (Decentralized Finance) decentralized finance is to provide traditional financial services through blockchain technology to replace the traditional financial third-party monopoly model, and improve work efficiency, enhance transparency, and reduce transaction friction (the rate generated in the transaction) ).
In general, DeFi can integrate traditional financial models (deposits, loans, investments, etc.) into it and become on-chain finance, while relying on the unique functions of the blockchain to create new services or financial derivatives.
Liquidity and liquidity crisis
Liquidity refers to the ability of an asset to be successfully realized at a reasonable price. It is a relationship between the time scale of the investment (the time it takes to sell) and the price scale (whether it matches the market price).
Generally speaking, it is similar to the price of masks during the epidemic. The selling speed is very fast and the price is higher, which means that the market is extremely liquid. If you are in urgent need of cash at this time, but it takes time to sell the RV, and the selling price deviates from the market price, this means that the market is poor.
Liquidity is particularly important in the financial market, especially in the trading market. In the secondary market, liquidity (trading volume) is a very important reference indicator. Financial assets such as water are valuable and vital only when they flow. The liquidity itself reflects the activeness of trading. If you want to buy, you can buy, and if you want to sell, you can sell. This is the best state in the market.
Liquidity Run The term liquidity crisis appears less frequently in the blockchain market. It mainly refers to the fact that prices in the financial market have fallen below the value, the number of market participants has fallen, and asset transactions have become difficult.
The liquidity crisis in the blockchain system usually occurs in exchanges and decentralized exchanges. At the same time, the transaction volume is too large, the lack of liquidity in the market leads to sharp price fluctuations, the overall price and value deviate, and small currencies run on On the market, unilateral liquidity withered (buy or sell, sell or buy).
In addition, there are few traders in a certain currency on the exchange, and the low liquidity results in the thin order book. Traders must abandon either time or price.
As a result, many components in DeFi have improved or completely solved the fundamental problem of liquidity, and brought DeFi to today’s heights, such as decentralized exchanges, AMM automatic market makers, lock-up funds (TVL) and lock-up funds Reuse (liquid mining, etc.).
DEX Decentralized Exchange
The core of decentralized exchanges is asset custody. First, let’s talk about centralized exchanges. The largest center in the decentralization of the blockchain system is the largest center of decentralization in the blockchain system. First, trade on the centralized exchanges, first withdraw currency or legal currency Purchase fiat currency to inject initial funds. Under this premise, your funds have been completely out of your control. The ownership is in the wallet of the exchange. At the same time, it also increases the pressure on the exchange party. Theft of coins is a normal event in the exchange. At the same time, any risk majeure on the exchange will result in the loss of users’ control over their own funds (OK suspension of withdrawal events).
Decentralization first solves the problem of decentralization, peer-to-peer transactions between customers, and no more institutions hold huge funds in wallets, avoiding huge risks, simplifying the transaction process and reducing transaction costs (no intermediaries make the difference).
At the same time, decentralized exchanges are also facing some problems, because there is no middleman (market maker) to maintain market depth, resulting in insufficient market depth (transaction volume), orders are too thin and too thin to accept large orders, transactions are delayed and The transaction fee rate is higher. However, decentralized exchanges are still the mainstream direction of the future market. When decentralized exchanges are sufficiently perfect, the most important openness of transactions, transparency will be an advantage that centralized exchanges cannot catch up.
AMM automated market maker
In order to achieve anonymity, openness and fairness, the industry has developed the AMM model (automatic market maker model). The difference between AMM and Tokenlon (over-the-counter quotation model) is that the market maker is completely open, and the entire transaction process is completely on the chain, which truly achieves decentralization.
AMM also faces many problems. The pricing algorithm is based on the constant product market maker model, which causes the market maker to be arbitraged and the market maker system cannot respond in time when the external market fluctuates.
Large trading volume causes slippage, and traders cannot predict whether the slippage risk is within a reasonable tolerance.
At the same time, automatic market makers are used for stable currency exchanges to improve market-making efficiency, provide one-click currency listings and provide extremely strong liquidity, which still completely surpasses centralized institutional exchanges on another track.
The essence of decentralized exchange liquidity mining is the use of locked-in funds (TVL) for fund reuse. The DeFi project started to basically determine the size and success of the entire project with the amount of lock-up, and the amount of lock-up determines whether the entire DeFi is recognized by the market, just like talking about the currency issuance fever in the past, the rise in currency prices is belief , The currency price drop is a scam. Few people try to understand what the value of the locked position is, whether the high locked position has funds to export and use the locked position to realize the cash, whether it is essentially a capital pool escape game. The state of DeFi at the hottest time is similar to the bull market of 2014-2015. Some market gimmicks appeared, a large amount of funds flowed into the market, and the overall effect of making money appeared. Most of the players who entered the market did not consider the value of the market at all, but only needed to see where the market leader is. , Where the funds go will get a higher rate of return, but without the support of the value system, it will be a feather after the heat.
The current state of DeFi is that it cannot find sufficient value system support. Since the liquidity mining boom has receded, the rate of return has gradually decreased, and the market has begun to enter the tail of the bubble economy. Funds are looking for new hotspots to flow or flow into projects with real value. Reconstruction from the ruins after the market bubble breaks is closer to reality and has more advantages than castles in the sky.
After the market bubble bursts, there are two huge advantages:
The appearance of a market bubble represents the degree of recognition of funds to the market and proves that the market has ideas and projects with great investment value.
The bursting of the bubble means that the profitable game of drumming and spreading flowers is about to end. When the game is completely over, those projects that have investment value in the market but have not appeared in front of the public will gradually emerge.
The following briefly describes a few projects based on DeFi-based decentralized finance concepts that are more attractive to investors
CoFiX (DEX) and NEST oracle machine-attracting centralized exchange users and providing vitality to DEX
The use of calculable financial concepts reduces the risk of market makers being arbitrage, while narrowing the scope of slippage and spreads to make transactions more fair. At the same time, the transparency and fairness of decentralized exchanges (DEX) will be extremely attractive to traders. If the combination of CoFiX and NEST oracles can make the transaction rate and cost of DEX close to those of traditional centralized exchanges, it will Great impact on the traditional market.
PoolTogether-a risk-free lottery game, attracting external users with high risk investment preferences to enter the market
The risk-free lottery is basically the same as the traditional financial model. After the user purchases the lottery, the amount is transferred to the fund pool. After seven days, the interest generated by the full amount is drawn to one lucky person to get all the interest, and the bonuses of other buyers are returned. A small game that will never collapse, and the fairness of decentralization will be more attractive than the lottery of traditional financial institutions.
Linear Finance-a synthetic asset exchange, attracting traditional secondary market users to enter DEX
The exchange as a whole is traded in a pledge pool, and the community proposes to list assets. If there is a price/index, it can become an asset transaction. It can trade attractive assets in the market, such as foreign exchange, precious metal markets, and shoes that have exploded. At the same time, building the platform on the Binance Smart Chain will bring its own parallel users and legal currency entrances and exits.
Nexus Mutual-an insurance product on the blockchain to reduce the risk of DeFi and recycle funds
The fund library method is used to provide insurance for the security risks and undiscovered errors of smart contracts. At the same time, a risk sharing platform is being built. However, its compensation model is to decide whether to pay through other members, and the overall compensation efficiency and risk still need to be confirmed in the market. However, its risk guarantee for smart contracts and future decentralized risk sharing still have great market potential.