Editor's Note: This article comes from Mars blockchain (ID: liantazhiku), Author: Yi Boling, reprinted by Odaily with authorization.
Editor's Note: This article comes from
Mars blockchain (ID: liantazhiku)
In 2019, DeFi has become the most concerned and fastest-growing field in blockchain applications.
In commemoration of the fourth birthday of Ethereum this year, someone compared IC0 with DeFi: last year, IC0 (the project party) held about 4.6 million eth in Ethereum, and now it is 2.3 million eth. This falling volume is allegedly referred to as the “death spiral” of IC0. Similarly, from last year to the present, the number of Ethereum held by decentralized finance (DeFi) is about 390,000, and now it is 2.3 million, which means that the locked eth in DeFi has made up for the death spiral. According to its prediction, the locked volume of eth will return to 4.6 million in one year.
At the crossroads of the future application of blockchain technology, DeFi is often referred to as the evolution direction of encrypted assets returning to focus on the value field and the financial field.
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The full spelling of DeFi is Decentralized Finance, translated as decentralized finance or distributed finance, which originated from a term in the native cryptocurrency community. The essence of DeFi decentralization is that everyone can participate in the market as an asset side and a liability side, without any third-party financial intermediaries or centralized institutions, which deviates from traditional centralized financial institutions.
Therefore, Hashkey Hub also calls it open finance.
However, many people questioned that DeFi is nothing more than a new concept created by Ethereum. After all, the purpose of many existing ones is to "harvest leeks". Is DeFi the dawn of the future of the financial industry, or is it a sickle reaching for leeks? Under the divergent opinions, DeFi, as a new thing, is facing a major test.
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The essential difference with the traditional financial industry
To understand decentralized finance, we may have to start from the traditional financial essence.
The financial institutions we usually come into contact with can be roughly divided into banks, funds, securities firms, insurance, trusts and other types. With the advent of the Internet era, all kinds of P2P companies and wealth management companies on the market, such as the Mutual Finance Company under Tencent and Ali, can be regarded as version 2.0 of the financial industry, called Fintech.
But most of them are not much different from traditional finance. They essentially adopt a centralized method, using their own authority, as a credit intermediary connecting the fund supplier and the fund demander, and then charge a certain amount of interest or return.
It is understood that these centralized institutions absorb deposits from ordinary people and invest in some specific institutions or entities. Due to regulatory requirements and differences in the types of institutions, they have the power to become "creditor's rights and income rights" for different business names and investment targets. , Equity, Stock, Currency, ETF, REITS, etc., the business names are also different, the purpose is to achieve the expected return on investment, or to prevent certain risks through hedging.
Data shows that by the end of 2018, the global asset management industry had reached a scale of more than 80 trillion US dollars. After the financial crisis in 2008, the compound growth rate of the market reached 12%. In recent years, the overall scale of China’s asset management market has remained at 124 trillion yuan. It will reach 200 trillion in 2020, mainly dominated by bank wealth management, trust plans, insurance asset management, brokerage asset management, and public/private equity funds.
The reason for the unprecedented popularity of the DeFi concept is nothing more than the operation mode with frequent mine-strapping incidents and prominent disadvantages caused by the excessive centralization of traditional financial institutions.
Take the 2008 U.S. subprime mortgage crisis as an example of the Hollywood movie The Big Short. The third-party intermediaries cannot guarantee their independence, and the credit ratings of the middle and low-level assets in mortgage asset securitization have huge errors from the actual situation, which eventually leads to information gaps and disasters.
It is understood that the black box of the investment process, the failure of the risk control link, the pet-like third-party evaluation agency, the centralization of the asset management enterprise structure, the short-sighted project benefits, the lack of asset liquidity, and the hollowing out of the underlying assets are the "seven cases" of traditional asset management institutions. crime".
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The picture comes from the Internet
Therefore, the "seven deadly sins" ultimately lie in third-party financial intermediaries. So, how can DeFi play the role of its application in order to solve the disadvantages of traditional finance that have been criticized for a long time?
Gu Yanxi, dean of the CBX Research Institute, explained to Mars Media that any financial industry is based on a database for recording and storing data. Brokers, banks, exchanges, etc. all have their own centralized databases. If these databases interact, they need to A data to record transactions.
If the business of the exchange is completed, it will be difficult for other institutions or users to carry out. After a day's trading, brokerages must wait until the exchange's data is cleared before they can know their own trading status, which is time-consuming and inefficient. Each system requires maintenance, and the cost is relatively high. Furthermore, the cost of reconciliation is high, and the record of the order placed by the broker is inconsistent with that recorded by the exchange. It is very troublesome that both parties need to coordinate to check and correct the error.
After the distributed financial application matches the transaction, the account is directly recorded on the blockchain, and after passing the consensus mechanism, all relevant nodes are recorded. Everyone sees the same transaction, so nothing goes wrong. The efficiency of the entire transaction will be much higher than before, which is the difference between distributed finance and modern financial technology. This automatic bookkeeping does not require human maintenance, the cost is reduced, the efficiency is improved, and the utilization rate of user funds will also be improved.
Most importantly, the credit of all parties in distributed finance does not require a third-party intermediary agency to bear.
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Pros and Cons of DeFi Classic Projects
The two major characteristics of DeFi are reflected in: it does not rely on any third-party financial institution intermediary; secondly, the Token on the chain is the only form of expression for the flow of financial assets. Therefore, stable coins and smart contracts have become the two cornerstones supporting DeFi applications.
It is understood that traditional financial products plus decentralized attributes can be transplanted into DeFi, including insurance and hedging business, mortgage financing business, and leasing business.
Established in 2014, MakeDAO is one of the projects of DAO and belongs to the earliest and most famous classic project of DeFi. MakeDAO is an automated mortgage lending platform on Ethereum and an issuance platform for the stablecoin Dai.
According to DeFiPulse, more than $500 million in value has been locked in the DeFi ecosystem on Ethereum. Currently, Maker’s Ethereum peer-to-peer lending system has signed contracts worth approximately $317 million.
USDT is currently the most widely used stable currency in the world. Its operating mechanism is to artificially mortgage the US dollar to the USDT issuer and the cooperative bank (US dollar custodian), and then issue the corresponding amount of USDT. A third-party intermediary is also required. It does not belong to the DeFi field in essence.
And MakeDao is a real way of DeFi, without any third-party intermediary participation. Its stablecoin Dai is issued by the full mortgage guarantee of the assets on the chain, and maintains a 1:1 anchor with the U.S. dollar. Users can establish a mortgage debt warehouse CDP smart contract on the MakeDAO platform and deposit valuable digital currency assets as collateral for borrowing Dai. Whether it is exchange or mortgage stable currency, obtain safe-haven assets and liquidity without taking centralization risks.
REX is equivalent to tokenizing the resources of the main network through the new tokens of the platform. In REX, the lessor pledges EOS in exchange for REX Token in exchange for memory, CPU, bandwidth and other resources, and the lease of memory, CPU, bandwidth and other resources can earn interest, which not only satisfies the lessor’s need to earn interest through idle resources , It also meets the resources needed for renters to rent for a short period of time without selling EOS.
However, both MakeDAO and EOS REX belong to the very early stage of DeFi. Although the concept of DeFi is very popular, there are very few users compared to traditional finance, so that DeFi projects are often complained that the technical threshold is too high, and it is difficult for ordinary users to get started. The current users are all people with certain technical capabilities. Both MakeDAO and EOS REX have certain problems of insufficient performance and security risks.
While appreciating the DeFi field, Vitalik once expressed deep concern about its security, "I have seen that DeFi faces many security challenges, and even prevents DeFi from moving towards large-scale applications. For example, a few days ago, there was a DeFi platform had a bug in its database, then got hacked and lost $37 million.” He believes that if the DeFi field cannot expand cautiously, it will certainly not be able to grow rapidly.
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HashKey Capital once wrote a report that the current development of DeFi is not hindered by the performance of the blockchain, but there are three other bottlenecks that need to be broken through, clear usage scenarios, clear price benchmarks, and easy-to-use infrastructure.
First, the current DeFi has a structure first and then needs it. From the perspective of technical structure construction, improve the use of DeFi facilities, so that real institutional investors can enter, so that digital assets can be applied in real construction application scenarios; Second, a clear price benchmark will be the cornerstone of DeFi product pricing. From a financial point of view, improve the price mechanism of DeFi products, so that DeFi can truly play the role of risk management.
Therefore, despite the popularity of the concept, DeFi faces and needs to solve many problems in order to truly attract retail users or large-scale participation of traditional financial institutions.
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Libra stablecoin public chain, or an accelerator for DeFi development
Some netizens commented that Dapp is dead, and DeFi is nothing more than another hyped concept of Ethereum after DAPP, and its purpose is to raise the price of currency.
Gu Yanxi believes that such comments are inherently problematic. DeFi is facing a lot of negative judgments, some of which can be explored. It is important to point out the status quo, but the key is to put forward the development trend and solutions.
"DeFi itself relies on dapp as its operating carrier, and it is still in the exploratory period. It is meaningless to judge any early things now. It is easy to criticize, but difficult to build. The key is how to tap the value of these projects and analyze which projects Being able to do it is the most important thing.”
He pointed out that DeFi is now facing three major problems: public chain, stable currency, and few tradable assets.
1. There are too many existing public chains, and the public chain market is too fragmented. Therefore, a more generally accepted public chain that can compete with Ethereum is needed, and then it can get more users. Only if DeFi is applied on it can it be promoted.
Second, stable currency is a very important step. Value exchange on the chain requires a medium for value exchange, that is, stable coins. There are currently some stablecoins in circulation on Ethereum, but there are too few participating users. If there is such a stable currency circulating on the public chain with many users, it will be conducive to the promotion and use of DeFi.
In fact, now that Libra comes out, it provides a very good opportunity. Libra provides a very good chain and the corresponding stable currency. Many key users of the Facebook social network around the world will migrate to the chain. That is to say, it has a good foundation in terms of technology and users. Conducive to the application and promotion of DeFi.
