What is the financial principle behind DeFi?
Before answering this question, let’s talk about housing prices in China.
I believe everyone is familiar with the phenomenon of housing prices.
At the beginning of this year, because of the pandemic, the Fed released a lot of water. The U.S. stock market, gold, digital currency, etc., have therefore been affected by this incident for a long time in the past, and have experienced a relatively large appreciation. The domestic capital market is also somewhat affected by external changes.
But our house prices are still as stable as Mount Tai, unaffected in the least. why?
This is mainly due to the increase in our housing prices over the past 15 years, not only because of additional currency issuance, but also other reasons, such as the maturity and perfection of the second-hand housing transaction market.
With the introduction of “no housing speculation” and various restrictions on purchases and loans, the freedom of the real estate market has been restricted to a certain extent. It has become more difficult to buy and sell houses. Because some people are not eligible to buy houses at all, the rise in housing prices has stopped.
What can we see from this phenomenon?
We can see that, in fact, a simple increase in currency does not necessarily lead to an increase in asset prices. Some asset price increases are affected by many factors.
The so-called asset liquidity must first be able to be sold and traded before it has a price, otherwise there is a price but no market. The prices of some houses seem to be very high, but in fact the transaction volume is very small, that is, there is no market, which means that liquidity is not good.
And what factors generally affect the liquidity of assets?
First, it is affected by the market. That is, if the market is restricted, or the market is small and does not exist at all, then any asset will be illiquid, because you don’t know where to find buyers, and you don’t know who can buy it.
Second, it is affected by price factors. Just like the current house, the price is already very high, so of course its liquidity is reduced, because fewer and fewer people can afford this house. Even if he is eligible to buy it, he may not have that much money to go. Buy, so your property cannot be sold unless the price is reduced.
Third, it is affected by time. Many companies in the real economy have to raise funds, that is, sell some of their accounts receivable at low prices and sell them to financial institutions to obtain funds. why? Because their products were sold, they didn’t actually get the money right away. In this case, they can’t actually be sold because you didn’t get the money and you can’t engage in the next round of production. This product is sold. There is no difference between going and not selling. So what to do? They sold the assets such as accounts receivable at a reduced price to obtain funds, which also meant that he sold his own goods cheaply. Therefore, in this case, the liquidity of assets is actually related to the time of fund recovery.
Let’s look at an example, whether it’s a stock exchange, a gold exchange, a foreign exchange exchange, or a futures exchange, what are their biggest characteristics?
First, there is a fixed and large market. Because you can see everyone in this market, they are all placing orders.
Second, the price is transparent. The price of each order is fixed. If you see a price and you want to sell it, you can immediately make a deal and get the money immediately.
This shows that the exchange is actually the best place to provide liquidity for asset holders.
We say that the existence value of financial institutions is not just exchanges, including banks, insurance companies, lending companies, etc. The greatest value of financial institutions is to provide liquidity.
And DeFi is actually better finance.
Why do you say that?
Because DeFi is a better mechanism for providing liquidity.
First of all, DeFi provides a kind of transparent liquidity.
Two perspectives, the first transparent market, the second transparent you.
The transparency of the market is very simple, that is, the information of the market is fully open, and the transaction is certain, which means that you can buy if you want to buy, and you can sell if you want to sell.
Because the market has transparency, its credibility has increased substantially, and everyone has a strong willingness to trade, which provides more liquidity for the market. So in fact, transparency is a big part of liquidity. Guaranteed.
Transparent you have two concepts: First, you can see your investment, and the entire market can see it. All traders are transparent, which means that no one can secretly manipulate a certain market, and everyone knows that everyone is completely equal. But he doesn’t know your identity, he doesn’t know you are Zhang San Lisi, he doesn’t know your ID number, he doesn’t know whether you are a male or a female. Therefore, any market is not qualified to restrict your entry into the market based on your personal identity attributes. This is another transparent perspective. In other words, you are a transparent person in the market.
Let’s return to the real estate market. The real estate market can limit your eligibility to buy a house based on your personal identity and allow you to be excluded from the market. In this case, your money will not enter the market. Therefore, the liquidity of the market is greatly reduced.
So we say that the transparency of the DeFi market allows you to participate in the market without any restrictions, and others know your situation. In this case, all non-market factors are reduced and everyone’s freedom is expanded, so naturally this market The liquidity will increase substantially.
Therefore, DeFi is a more fluid mechanism.
The characteristic of DeFi is called borderless mobility. What does that mean? In traditional financial institutions, your money is either in bank a or bank b, or you go to insurance company c to buy insurance, or you put your money on the stock exchange to buy and sell stocks. Anyway, your money is always locked in a financial institution. If you want to put it in another financial institution, it is usually at least t+1 time. When you find that all the better products on another trading floor have investment value, you can’t immediately put your own The money was taken out and invested in a new trading venue.
This problem does not exist in the DeFi field. You can escrow a fund through a smart contract, and you can buy the financial assets you want at the best price from multiple exchanges at any time.
In addition, no matter what kind of agreement the DeFi market is, including exchanges, lending, derivatives, and insurance, they are all composed of smart contracts. We can not only use funds for transactions on multiple exchanges at the same time, but also transfer our funds between exchange lending and derivatives insurance markets.
In this case, our capital efficiency has been greatly improved, and it can also promote competition among multiple markets, such as transaction fees and product prices. So in general, DeFi promotes liquidity and promotes the willingness of market investors. This is what we call the benefits of DeFi through borderless liquidity.
Regarding DeFi, many people hold such a view: I admit that DeFi is better finance and DeFi can provide better liquidity, but does DeFi help society? Does it promote the real economy? If DeFi does not help the real economy, will it become a gust of wind like some other financial phenomena?
In this regard, I mainly talk about two aspects.
First, the relationship between finance and entities is actually the relationship between river water and well water. Only if the water volume of a river is large enough, the flow velocity is fast enough, and the distribution is wide enough, can it allow the water to penetrate into more wells and penetrate the ground. The inherent characteristic of the entity is a small number of slow, independent units. It must rely on river water to infiltrate it in order to make its water more abundant.
So from this perspective, the first priority of finance should be whether the water volume is large enough and the flow rate fast enough? Is the distribution wide enough? As long as these conditions are met, the real economy has a greater chance of obtaining water.
We can’t think too much about the relationship with the real economy to determine what direction finance should develop, or we must use the relationship with the real economy to judge what is better finance. In fact, finance with better liquidity mechanisms is better finance.
Second, when the asset has been traded in the real economy and cashed out, we return it to a mortgage lending platform such as DeFi through funds, the asset certificate is also withdrawn, and the entire transaction process is over.
Is it possible for Chinese SMEs to successfully raise funds overseas? It was impossible in the past, because the overseas financing is often high-credit large enterprises, they are financing through the issuance of bonds or the issuance of stock Ipo, and the credit qualifications of small and medium-sized enterprises do not have any ability to use debt or Ipo went to finance.
But if you use the supply chain finance model plus the DeFi model, in fact, this thing is completely possible.
Finally, to summarize, my core point is that DeFi is better finance, because it can provide better liquidity. In addition, we can also extend a DeFi project judgment standard, how to judge its quality? That is to see if he has created a better fluidity model through code and pattern design. If it is, it is clearly a valuable project. If not, he may simply imitate others, or even an air-hyped project.
From this perspective, we actually say that the entire DeFi industry and each of its projects are ultimately attributed to a standard, whether it can better provide innovation in liquidity.
At the same time, this is also the financial principle behind DeFi.
