Open Finance from the Perspective of Web3.0: Dialogue with Acala

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Foreword: “WebX Lab” is always trying one thing, that is, as a business observer, combing Web 3.0 from Gavin Wood’s forward-looking vision into a systematic and concrete story. Under a clearer main line, connecting the fragments of blockchain development will allow more people to better understand the era of decentralized networks and how it is coming.

[Why talk to the Web3 world? 】

“WebX Lab” believes that the vision of W10.21eb3.0 needs to be completed by a large number of diversified Polkadot ecological projects. Therefore, we hope to develop long-term cooperation with high-quality projects in these ecosystems (especially Polkadot ecology). Sexual dialogue and communication, with the help of the perspective of these pioneers, to build a more full and profound panorama of Web 3.0.

This time we invited Polkadot Financial Center-Acala, a more complete financial system perspective to interpret the nature of Web 3.0 at the value level.

Acala translates to “the King of Unmoving Ming”, “not moving”, meaning unshakable, the “bright” is the light of wisdom, and the “king” controls all realms.

Why look at finance

Can you see the essence of Web 3.0 better?

First of all, after we accepted the concept of blockchain for the first time, our imagination began to extend to the overall concept of Web 3.0, and many people entered this field through Bitcoin and exchanges, and traced the entire development process. Finance can Said to be the most successful field of decentralization or blockchain development, DeFi, which has just experienced the summer of the bubble, is an extremely typical evidence.

This success reflects the market’s strong demand for decentralized finance. As an important part of the Web 3.0 world, the strong demand in the financial field does not mean that the special needs of users of Web 3.0 are different from the current world? The clearer this difference, the more we can understand the nature of the Web 3.0 world.

DeFi

What does it bring to Web 3.0?

The word DeFi literally translates to decentralized finance, but after a comprehensive consideration, it is obviously more appropriate to use open finance, because decentralization is a means, and openness is the result. When it comes to the advantages of DeFi compared to traditional CeFi, these have been said to be bad, nothing more than lowering the barriers to entry, inclusiveness, eliminating agent risks, etc., but these may still be some superficial features The difference may be much simpler to rise to the value level.

First of all, we must understand the nature of finance and its value to human society. Almost the same time, when mankind had the concept of private property, financial services arises. Human nature is profit-oriented, and finance is the technology or service developed by human beings to maximize the benefits.

Take the insurance we are most familiar with. Everyone pays a sum of money to the insurance company for fire insurance. If someone is unfortunate enough to suffer a fire, he can get a sum far more than what he paid, thus avoiding the financial distress caused by the fire. At first glance, insurance companies are losing money, but after all, fires do not happen frequently. As long as the overall premium can make up for or exceed the cost of claims, it is generally profitable. Then insurance companies create corresponding insurance financial products through complex risk calculations and models. Everyone takes what they need. Individuals insured can avoid risks. Insurance companies make money. The smallest asset benefits the entire society. This is the maximization of benefits, and it is not necessary to produce something that is visible and tangible to produce output.

Therefore, the intrinsic value of finance is divided into two layers. First, let the funds go where they are needed more, and second, maximize the value generated by the funds.

Then why does open finance in Web 3.0 mapped by DeFi succeed in attracting attention? First of all, no matter how much change Web 3.0 will produce, it is still a part of human society. The production and operation activities in this world still need finance to efficiently allocate assets. Then why did open finance succeed in the first place? Because the effect produced by the result is in line with the human pursuit of maximizing benefits.

The essence of finance is an economic activity linked to credit transactions and currency circulation. In this process, one party transfers the ownership of commodities (including currency) or part of the power to the other party on the condition of repayment by the other party. The party who delivers the goods first needs to bear a certain credit risk. Credit risk will generate a lot of transaction friction costs , and you will never lend money to someone you know. In the early days, we needed an intermediary with a very high degree of credit to eliminate this frictional cost. Such an approach is the most practical when the financial market is not very developed. However, driven by factors such as the increase in the overall personal wealth of society, the growing financial awareness, and the great development of financial technology and activities, new thresholds and costs have been generated. The platform has earned most of the economic value-added, and all parties pursue the greatest benefits. The goal of was blocked again, which caused some people to start looking for a new way out.

What DeFi brings is a more open financial environment. In a narrow sense, DeFi is a 24-hour non-sleeping financial market. The second DeFi uses blockchain technology to eliminate a large part of the friction cost of credit transactions, which is a transparent financial market without intermediaries. The third is that individuals can conduct financial activities more efficiently and conveniently. In theory, users only need a wallet address and a certain amount of funds to perform a series of financial operations on DeFi. The final effect of these characteristics is to meet people’s actual needs for maximizing benefits.

What we can be sure of now is that one of the changes brought about by Web 3.0 is that everything is being transferred to the network in the form of data, including physical assets, social relations, and business activities. On the other hand, the user’s sovereignty over data will change from limited ownership to full ownership, and then these data will become an asset owned by individuals. In this way, the assets on the entire network will be greatly enriched, and the most immediate problem facing next is the generation of financial demand.

At this time, Web 3.0 requires a matching financial system to carry out reasonable resource allocation, and DeFi bears this role.

New understanding of DeFi:

From a single product to a complete system

At this time, we can actually use DeFi to understand the current traditional financial system. Although DeFi may have some mutations, the business form based on demand will generally not change. Borrowing, general equivalents, and derivatives are examples. . Therefore, according to this model, the future space of DeFi will be very large, which is not only in the order of magnitude but also in the scope of business.

In the past, we may focus more on a single DeFi product. For example, Compound basically represents lending, MakerDAO basically represents a decentralized stable currency, etc., but with the development of DeFi, the relationship between single products is also More and more clear, follow-up innovators also pay more attention to the systemization of DeFi products.

During the interview, we will learn that Acala is more like a financial system. First of all, the core of Acala is two low-level DeFi protocols. One is the stable currency Honzon stable currency protocol that supports cross-chain multi-asset over-collateralization, which provides the most basic general equivalent assets for the entire network. The other is to release the liquidity of pledged assets, the Homa Staking Derivatives Agreement, to output more liquidity. At the same time, there are some necessary infrastructures like DEX. The open financial system of Acala has two other roles, namely Laminar, a synthetic asset protocol, and Polkawallet, an entry-level application.

Web3.0视角下的开放金融:对话Acala

In such a system, we can see a more complete business closed loop. First of all, the Honzon stablecoin protocol is the main method of generating stablecoins in the Acala network. As a carrier of value exchange, it helps Acala users to open collateralized debt warehouses (CDP) to generate stablecoins aUSD, which users can use to make stablecoin loans. It can also be used as the core stable currency in the entire system, so that peripheral applications can generate a lot of demand for it. And the part of the assets that users locked after over-collateralized lending, including other staking operations, forms a huge waste of liquidity. At this time, the Homa Staking Derivatives Protocol can convert these locked assets into tradable liquid The value vouchers on the chain will once again generate revenue, which can provide a large amount of liquidity for the entire financial ecology.

After sufficient assets and liquidity appear in this ecology, two kinds of demand will be derived. The first is trading . Acala’s internal DEX meets the needs of trading. The second is synthetic assets, that is, the use of stable assets to issue synthetic assets for margin trading to obtain higher value. At this time, Laminar can play a role. The liquidity released by the Honzon stablecoin protocol can once again return to the Laminar or Honzon stablecoin protocol, and it will go back and forth.

The role of Polkawallet is a user portal and user pool. This is a very efficient design , that is, as long as users are in the Polka ecosystem, they can directly switch to Acala or Laminar through Polkawallet. Intuitively, Polkawallet has gathered a stable user pool as the source of high user growth for the entire alliance. The assets held by these users will once again start a new round of circulation from the Honzon Stablecoin Agreement or the Homa Staking Derivatives Agreement.

So why did Acala choose these directions, and what are the roles of its products?

Stable coins, lending, trading, synthetic asset derivatives

The development path of open finance

Compared with the outbreak of the summer bubble in 2020, the development of DeFi before this is more meaningful. MakerDAO was launched in December 2017, Compound, Uniswap, and WBTC were launched in 2018, and Synthetx was launched in 2019. Because these products were the products of real demand before the liquidity mining boom.

Stablecoin

First of all, finance in a broad sense refers to all economic activities related to the issuance, custody, exchange, settlement, and financing of credit currency. In principle, it is an instrument system based on currency. Then this point also applies to open finance. As the lowest carrier of assets, stablecoins constitute the entire market. Both lending and mortgage liquidity transactions require stablecoins, and DeFi requires such general equivalents.

And the initial open finance lacked such a role. The core of human economic activities is transaction. Blockchain solves the transaction friction cost caused by the trust problem. However, at the beginning, the high volatility of mainstream assets such as BTC and ETH could not serve as the general equivalent of real currencies, which also caused a lot of The high friction cost is definitely detrimental to the entire blockchain industry . At this time, things like stable currency are needed to intervene. The most efficient way is to anchor the legal currency or assets in reality. However, because the stablecoins issued by third parties always have the problems of custody, reserve black box and unlimited additional issuance, it has given birth to new species such as centralized stablecoins.

Web3.0视角下的开放金融:对话Acala

The market for decentralized stablecoins is extremely large. First of all, the total issuance of the entire stablecoin market has reached 15.7 billion. DAI, which hasn’t been out for a few years, quickly became stable with USDT occupying an absolute dominant position. The only decentralized stablecoin in TOP3, the U.S. Currency Supervision Bureau even allows banks in the US federal system to provide mortgage asset management services for private parties to issue digital stablecoins.

Borrow

Opening up finance is an extremely important part of lending. After humans have enough assets, they will inevitably hope that these assets can further generate value. It is a natural habit to obtain interest through borrowing. Around 2018, the entire cryptocurrency market is more conservative, and the market needs richer financial instruments to generate higher liquidity. In addition, due to the overall decline in prices, currency holders began to slowly turn to “borrowing” and “financial management” as value-preserving and value-added financial tools. Borrowing was actually the best way at that time. In fact, decentralized stable currency is essentially a borrowing behavior.

And the demand also exists. First of all, the borrowers are those quantitative trading platform cryptocurrency hedge funds, blockchain project parties, mining farms, etc. They hope to obtain cash flow by collateralizing digital assets, or borrow high-yield assets by collateralizing assets with low current yields to hedge risks . The lender hopes to get additional income from the assets in their hands. Why not trade directly? Because in decentralized mortgage lending, both borrowers and lenders can obtain income at the same time, and both hands are “oiled”.

Derivatives, synthetic assets

The above mortgage behavior and the current mainstream POS network staking behavior will cause a large number of assets to be unable to circulate, and there is no way to continue to generate value. Including the subsequent bull market, the user’s mortgage assets missed the opportunity for income in vain. Then, subsequently, tradable derivatives based on the locked-in asset issuance chain were created to solve this dilemma. At the same time, synthetic asset agreements such as Synthetix or Wayki-X use a form of digital asset mortgage, through the price feed of the oracle machine, to cast any valuable asset targets in real life, even non-asset type targets. Users mortgage a certain amount of digital currency to cast synthetic stable coins, and then these synthetic stable coins can be converted into any synthetic assets through smart contracts, which can be crude oil futures or stocks. The mortgager makes money that the trader loses.

On the other hand, Acala’s Homa Staking derivatives agreement is also based on the demand for liquidity appreciation. From the perspective of Polkadot itself, the development of ecology requires a lot of assets. The huge amount of mainstream assets such as BTC and ETH is a main source, but the key is that mainstream assets need to be bridged to the Polkadot, which takes a certain amount of time. So the first thing that can be used in the Polkadot network in the early stage is only DOT, but the problem is that Polkadot itself is a POS network. In the early stage, it will eat a lot of DOT to provide the entire system with strong enough shared security. One of the problems that will arise is that a large number of DOTs are frozen, which cannot further expand the income and generate more value. The other is that the liquidity of mainstream assets in the entire network is tight.

Users can get the corresponding L-DOT after pledge on the Homa Staking Derivatives Agreement, and L-DOT can participate in trading or mortgage lending to obtain income again. The main business of Laminar of Acala Open Finance Alliance is also the direction of synthetic assets and margin trading.

transaction

After the assets in the market are sufficiently abundant, the demand for transactions will also be strong, but what is different from the past is the sudden change of DEX. Because DEX is completely decentralized, transparent, open and has no centralized authority control, there are not too many KYC channel restrictions, no secret price manipulation and transaction volume fraud, all transaction records are on the chain, these characteristics make it It is sought after by a large number of users.

Different from traditional centralized exchanges, decentralized exchange DEX allows people to inject assets into the capital pool to provide liquidity, and these assets can be traded by other traders. As a liquidity provider, there will be transaction fee dividends and incentive tokens, which is equivalent to two uses of one fund. This part of the mortgaged funds will be continuously used by traders, so it also has a high utilization rate.

The next step in open finance

The economic foundation determines the superstructure. We can see that after DeFi has completed a series of foundation laying, the needs of users and the services on the market have become more and more diversified. With the development of these superstructures, the demand market for these underlying facilities has also increased. It will become bigger and bigger, just like Chainlink.

After Acala builds these underlying facilities, it will provide DeFi entrepreneurs with an environment similar to a distribution platform in the future. Developers can deploy smart contracts on Acala and can easily obtain assets, users and other resources on this platform. . This is also a valuable action for Acala’s open finance itself, because the upper-level demand will further drive users’ demand for stablecoins and lending.

The recent hot discussion of NFT, although the current popularity does not match the expectations of the outside world and its maturity, but its value space cannot be denied, because conventionally, people entering this market must first hold Bitcoin and Ethereum This mainstream cryptocurrency is used as an asset, but the holders are still a minority, which is extremely detrimental to the blood transfusion of users and assets to the entire market.

But now NFT is equivalent to skipping the link of holding cryptocurrency, and in reality, users use NFT to get their real assets on DeFi for mortgage lending. Compared with traditional finance, the cost and threshold are higher. low. The greatest value of NFT itself is its ability to carry value.

[Views of WebX Lab] :

In the future, we may need to understand DeFi more habitually as open finance, rather than decentralized finance. Because in reality, DeFi and CeFi do not have very obvious opposition and separation conflicts. Instead, they are a state of mutual integration. The concept of open finance can better summarize the current situation, because as mentioned above, open finance is One result means that financial efficiency is further improved. Decentralization or centralization may be one of the means.

By observing the development of the open financial system, we can help us understand the connotation of Web 3.0, because in such a limited environment and scope, we can compare clearly what changes have occurred in certain characteristics of the Web 3.0 concept , What value is produced. This kind of causality is extremely credible, because essentially human nature’s profit-seeking instinct is the least deceptive.