Produced | Odaily (ID: o-daily)
Produced | Odaily (ID: o-daily)
In July 2019, Deutsche Bank (Deutsche Bank) announced a major plan to lay off 18,000 employees worldwide. At that time, a snapshot captured the attention of major media. In this picture, two men in suits and leather shoes came out of the bank's office building, and one of them was carrying a canvas bag with the word Bitcoin printed on it.
At the time when traditional banks are in decline, decentralized finance also has a hint of subversion.
2019 is the year of the wind of decentralized finance (Decentralized Finance).
Decentralized finance is the use of financial services based on blockchain technology. Products include decentralized lending, decentralized exchanges, decentralized derivatives, and more.
In the past year, blockchain technology has tried many landing scenarios. In the end, Ethereum abroad seems to have silently reached a certain consensus that DeFi is the best application of Ethereum smart contracts.
It is estimated that the global bond market has exceeded 100 trillion US dollars, the global stock market value has exceeded 64 trillion US dollars, and the total market value of the global derivatives market is about 12.7 trillion US dollars. If DeFi can get a share of it, it will be a huge market.
The popularity of DeFi is not without reason. Affected by the bear market in 2018, decentralized lending represented by MakerDao has gradually entered the public eye. When the overall asset price of cryptocurrencies declines as a whole, lending, stable currency and derivatives have become the way for people to survive the bear market. At that time, DeFi projects including Veil, dYdX, and Dharma successively received investment from Wall Street capital against the market.
The market size is also growing rapidly. According to DefiPulse's statistics, on June 27, the total lock-up amount in the lending market reached its highest point, approximately US$602 million, an increase of approximately 129.77% compared to the US$262 million on January 1 this year.
But recently, two laggards have appeared in the rapidly developing DeFi industry. In July of this year, Veil, Ethereum’s second largest prediction market platform, announced its closure last week. This project, which had been funded by well-known venture capital institutions such as Paradigm and Sequoia, survived for only 6 months. In early August, San Francisco-based crypto lender Dharma also tweeted its decision to suspend new deposits and loans on its platform.
At the same time, people found that the lock-up amount in the entire lending market has been on a downward trend since reaching a high point on June 27 this year, and has dropped by about 30.59% so far.
As a result, some different voices began to appear about DeFi. Wan Hui, the founder of Primitive Ventures, posted on Weibo that DeFi is the self-help concept of Ethereum after the concept of DApp is cold on Ethereum.
secondary title
Star projects Veil and Dharma suffer setbacks
In July, Veil, a star DeFi project launched only half a year ago, announced that it would cease operations.
This forecasting derivatives trading platform jointly launched by the decentralized forecasting platform Augur and 0x has been favored by Sequoia and crypto funds 1confirmation and Paradigm.
At that time, the three major applications of DeFi were lending, stable currency and decentralized exchanges. Veil, which started out as a prediction market, is seen as a force to revitalize the new DeFi track. In May of this year, Veil launched a decentralized market prediction service for the 2020 U.S. presidential election, which once became a topic.
If you look back at Veil's daily activity and transaction volume data before the shutdown, it is not difficult to understand that Veil is hard to turn around. According to DefiPulse, since its opening, Veil’s total locked positions have not exceeded the 90,000 USD threshold, accounting for 0.01% of the total DeFi locked positions, and its parent company, Aurgur, which also focuses on the prediction market, only accounts for 0.15% of the locked positions . On the Veil page, except for the presidential election project, the amount of participation in the predicted events exceeds 10,000 DAI, and the participation amount of most of the predicted events is less than 10 ETH.
In the outage description, founder Paul Fletcher pointed out three of their dilemmas:
1. We want to do too much. Prediction markets are a broad form of gambling, derivatives, and insurance, among others. A centralized version of these verticals may be more user-friendly than a generic form;
2. We didn't provide a good entry experience. Cryptocurrency as a user base is still in its early stages, and we are not providing enough convenience for those users who do not have a cryptocurrency or a wallet;
3. We are not decentralized or regulated. Some users want a fully decentralized, unstoppable product; others want a regulated product. It's hard to offer something in between that people find valuable.
In general, it can be concluded that the prediction market is small, the user threshold is high, and the balance between decentralization and supervision is difficult to control.
Regarding Veil's exit, Dai Shichao, head of market public relations at Hydro Protocol & DDEX, commented: "There is no currency issued, and there is no secondary market burden. It is a trial and error on the track to stop losses in time, and he also shared his failure experience when he exited."
One month after Veil announced its closure, the decentralized lending platform Dharma experienced difficulty in withdrawing coins from users and the contract code was closed source. DappTotal’s DeFi data showed that Dharma’s locked assets fell from $21.87 million a month ago to August. 74% of the USD 5.61 million on the 2nd has been withdrawn and is in a state of asset outflow. Dharma was once misunderstood as "running away".
A week later, the founding team stated that the suspension of lending was to create a better user experience.
The background of Dharma has many similarities with Veil. In February this year, it announced the completion of financing of 7 million US dollars. Investment institutions include star capital such as Green Visor Capital, Polychain Capital, Passport Capital, Y Combinator and Coinbase Ventures; the founding team is also strong , the founder graduated from Stanford and worked for Google and cryptocurrency exchange Coinbase.
When analyzing the reasons why Dharma's development is hindered, the cancellation of subsidies and the P2P matching model are common voices. In February this year, Dharma launched a subsidy policy for customer acquisition and lowered loan interest rates; however, the subsidy was canceled in May this year. According to its data released in May, since the subsidy was abolished, the total amount of locked positions has dropped by 60% compared with April.
The P2P matching model is a feature of Dharma. In the P2P matching model, the borrower and the lender are manually matched, and the lender’s funds are locked during the lending period. Only after matching with the borrower can he start earning interest, and the loan interest rate is fixed ; In contrast, the competing product Compound is a decentralized liquidity pool that allows users to share their assets with other borrowers on the platform to create dynamic interest rates based on the supply and demand of the asset pool.
Dai Shichao, head of market public relations at Hydro Protocol & DDEX, also said, "Dharma is a P2P model. The success of the matching and the speed of withdrawals all depend on luck. The sudden drop in the lock-up amount is related to the fact that they stopped the interest rate subsidy. There is no interest rate advantage. Manual matching is inefficient, so users are lost.”
secondary title
The Dilemma of DeFi
With the development of the DeFi industry, the "dilemma" beyond the blue ocean of "opportunities" in the DeFi industry is gradually surfacing.
User threshold and experience
In addition to the difficulties encountered by Veil and Dharma, user threshold and experience are common problems of decentralized products, and DeFi is no exception. "Difficult to use" is the problem of too many DeFi products.
Hydro Protocol & DDEX COO Wang Bowen pointed out that the threshold for users is to manage their wallets, private keys, and understand contract interactions. And these have requirements for finance and blockchain reserves.
Lucas, head of the Kyber Network China market, further pointed out that the current cross-chain technology is not mature enough, resulting in insufficient user experience in cross-chain transactions; in addition, the insufficient performance of Ethereum will lead to network congestion under certain circumstances, making Ethereum The DEX on the market has no way to handle transactions well. For users, this will also cause obstacles in experience. The liquidity of the decentralized ecosystem is also somewhat different from that of centralized exchanges or application ecosystems.
The user threshold and experience directly caused the small number of users. At the previous StakingCon -- Staking Ecological Conference co-hosted by Odaily and BlockBeats, Professor Jiang Xuxian, founder of PeckShield, analyzed the data of Makerdao, Compound and dYdX and found that the total amount of loans on these lending platforms has increased significantly. From around 34 million to 220 million at the end of June, it has increased more than five times in just a few months. However, compared with the great increase in the total amount of loans, the number of users of DeFi projects is relatively small. He said that this will be a major challenge for the entire lending industry.
risk disclosure
At present, lending products can be divided into fixed-term and non-fixed-term loan options according to the loan period. The risk coefficients of the two are different. For DeFi products, the necessary risk disclosure is also very important.
NUO, a non-custodial lending agreement that has recently become a rookie in DeFi, once ranked among the top five DeFi projects in the US dollar value locked list in April. Recently, it has encountered complaints from users due to risk disclosure.
A netizen named whuttheeperson posted on Reddit that his fixed-term loan pledged on NUO was liquidated within the agreed lock-up time. He believes that unlike open-term crypto loans like Maker and Compound, fixed loans do not have a significant liquidation risk, and they have adjusted the parameters sufficiently to accommodate the risk of devaluation of risky collateral during that time.
He also believes that NUO obviously has a huge negligence in risk disclosure during its loan process; on the contrary, the more mature MakerDAO will have relevant risk warnings at every step.
Crypto Asset Limits
Yang Mindao, founder of dForce and Blockpower, believes that the problem with DeFi is that there are too few encrypted assets that can be truly mortgaged.
It must be admitted that even though DAI and USDC are the absolute top stablecoins in the DeFi field, they have not achieved universal adoption in China, and the scale of decentralized lending is only 1% of that of centralized lending.
The current DeFi track only has more players on Ethereum. Of the top 50 financial dApps, 42 are built on Ethereum, including MakerDAO and OmiseGO; of the top 50 exchange dApps, 44 are built on Ethereum, including Augur and Uniswap.
The singleness of assets also makes the DeFi lock-up volume susceptible to the influence of the ETH market. Regarding the recent decline in the lock-up volume, Pan Chao, head of MakerDao China, said that the main reason is that the ETH asset market is down, and many people exchange ETH for stablecoins. At present, the lock-up volume of the stable currency DAI has increased to more than 30 million US dollars.
Insufficient risk control system
Since risk control relies on collateral, collateral prices affect risk. Therefore, the on-chain oracle (a mechanism for discovering and submitting real data to smart contracts) has become the focus of the current DeFi industry.
An accurate, fast, unbiased price oracle that is resistant to price manipulation is regarded as the "missing puzzle" of DeFi products. The existing centralized and decentralized oracles each have room for improvement: centralization means that there is The risk of price manipulation, and decentralized oracle machines still have insufficient incentive mechanisms, making it difficult to provide real-time and accurate prices.
The oracle machine of the decentralized exchange Uniswap is considered to be the current leader. Instead of matching buyers and sellers through the order book, it collects the liquidity of market makers and uses algorithms to set prices. As long as there is a price difference, it will Arbitrage opportunities will be created and prices will be corrected quickly. However, the current recognized disadvantage of Uniswap is poor liquidity. Some people say that "500 ETH will collapse immediately".
At present, the vast majority of DeFi projects use Makerdao oracles. According to Pan Chao, the Maker oracle machine is a distributed oracle machine, which selects the prices of 14 exchanges and selects the median to feed the price.
Pan Chao believes that the problem of the oracle machine mainly depends on what the provider of the oracle machine pledges, whether it is reputation or assets. To solve the problem of the oracle machine, it is actually to solve the reputation problem on the chain; at present, such a reputation system is not mature on the chain.
The lack of a reputation system also affects the user experience of DeFi.
“The biggest shortcoming of DeFi right now is its reliance on over-collateralized debt positions”. Campbell, Director of Fitzner Blockchain Consulting said so.
Take MakerDAO and Compound, which currently have the highest locked positions, as examples. Currently, MakerDAO requires users to deposit 1.5 times the price of ETH to establish a collateralized debt position (Collateralized Debt Position) that supports Dai. Most choose to keep their loan-to-mortgage price ratio at 300% to avoid double-digit liquidation penalties. In addition, Compound’s loan interest reaches 6-13%, and the collateral for all loans is 1.5 times the loan value.
Campbell said that there is a contradiction between the reason for users to borrow and the demand for excess mortgage capital. If the mortgage asset price falls and the position is not covered in time, it may face the risk of liquidation.
Pan Chao believes that the lack of credit loans in the current DeFi industry is precisely to establish a mature reputation system. At present, "it is still very difficult."
commercialize
The decentralized derivatives trading platform dYdX has emphasized three main commercialization models of DeFi projects: value-added through the project’s native tokens, such as MakerDAO (MKR); income through service fees, such as Compound; through user-oriented applications The program is commercialized. Such as dYdX, Dharma and so on.
secondary title
Where is the development direction of DeFi?
The "defeat" of Veil and Dharma, in the eyes of most industry insiders, seems to be mostly due to their own factors.
And compared to poor management and bankruptcy, people in the industry are more inclined to the expression "teardown and rebuild". Hydro Protocol & DDEX COO Wang Bowen believes that both Veil and Dharma are changing directions, not closing. "DeFi's attempt is the same as that of a startup company. If it finds that the direction is wrong and there is no data growth, quickly change direction." He pointed out that Dharma's current suspension upgrade is to transform the previous P2P lending into a compound-like fund pool lending method.
Yang Mindao also thinks that there is no need to over-interpret it. He said that Veil and Dharma are a very normal process of trial and error for entrepreneurial projects, and the market should give these projects enough patience.
But Veil and Dharma are also showing that DeFi, which is on the rise, is not all roads lead to Rome, and the development space of different track markets is different.
Yang Mindao believes that the decentralized open financial protocol, the infrastructure provided to the B-side, has only now begun large-scale construction, and there are a lot of opportunities. Creating a highly modular, detachable, and interoperable general protocol is the correct posture for the public chain to land at this stage.
In addition, infrastructure-level opportunities are in the tokenization of off-chain assets (for example, stablecoins are the on-chain of fiat currency), which is a ten trillion-dollar market.
Pan Chao also holds a similar view. He said that stablecoins are a necessity. In contrast to traditional finance, there must first be a currency market and then a capital market.
In addition, he believes that the future of DeFi should break away from the concept of "decentralized finance" itself and become open finance. If DeFi wants to expand the market by ten times or a hundred times, it must be done to put traditional assets on the chain, although there must be some There will be a trade-off for decentralization, but if the business logic on the chain, such as custody and mortgage risk settings, are sufficiently decentralized, it still meets the original intention of DeFi.
He gave an example of DeFi lending applications. The assets behind them may not be fully decentralized assets such as Ethereum and Bitcoin, but synthetic traditional assets (endorsed by traditional institutions on the chain). From this point of view, it still belongs to the category of DeFi.
Pan Chao said that he is also more optimistic about the bond market on the blockchain. Synthetic products including traditional government bonds and corporate bonds are on-chain, as well as bond products of cryptocurrencies themselves. From the perspective of the traditional currency market, it is the most liquid and the largest financial product. The recent popular staking is the prototype of the bond market, provided that the system continuously generates cash flow.
As for the restrictions on DeFi assets, Mindao believes that BTC on ETH (referring to the issuance of ERC20 tokens supported by BTC) is a potential project, "It will bring dozens of times the collateralizable assets, and a coinage that solves the incentive problem is needed The alliance, exchanges, wallets, and project parties can all participate in BTC minting, and I personally think that this alliance will have a breakthrough in the next year."
Looking back at the birth of DeFi to the present, it has only been a year.
This year was a year of rapid development of DeFi. The DeFi ecosystem began to gradually take shape on Ethereum, and applications around stablecoins, lending, derivatives, and decentralized exchanges were born.
But one year later, the shutdown of star DeFi products forced us to re-examine DeFi on the hot spot. The future is still promising, but it must be admitted that there is still a long way to go before DeFi takes on the important task of "blockchain future". Compared with the amount of funds and users in the traditional financial field, today's decentralized finance is still insignificant, and the users almost come from the stock user market in the encrypted world, and the lending business accounts for 90% of the proportion. These difficulties come from user barriers, capital and technical limitations.
The good signal is that if you are poor, you want to change, and "dilemma" means a new "opportunity" for DeFi. Whether it is Coumpound, Uniswap and other products that have or will launch V2 versions, seeking to evolve and upgrade; or DeFi products such as Blockfi and dForce have recently received financing, it shows that the industry still has a lot of imagination.
This is an inevitable trial and error. But where to go after the wrestling is a question that the DeFi industry needs to think about and continue to think about.
