This article is the first in a series of blockchain reports on DeFi and open finance.

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Mortgage digital currency

In the financial field, mortgages are a very common financial product.

We can borrow against houses, cars, or even goods.

Mortgages have long been viewed as a relatively safe form of financial lending because financial institutions can sell the collateral once the borrower fails to repay the loan.

For example, the borrower mortgages a house with a market price of 1 million and borrows 600,000; if the borrower fails to pay the money, the bank will auction the house. still earn.

In recent years, in the field of digital currency, a new model has also emerged: collateralized digital currency lending.

If a user wants to borrow $100, he needs to transfer at least $150 worth of ETH to the platform, after which the system will automatically release the money.

Compared with the traditional mortgage loan model, digital currency mortgages have unique advantages in terms of operating costs.

For example, when mortgaging a house, the platform needs to verify whether the borrower is the real owner of the property and evaluate the property price.

Once the borrower is unable to repay the loan, the platform also needs to pay manpower and time costs to auction the property.

The same is true for mortgaged cars. The financial side has to find a garage to store the car, and it has to be appraised and auctioned later.

The mortgage process of these traditional finance is very long and costly.

As a digital currency lending platform, there is no need to face these problems.

When ETH worth $150 falls below $100, the platform will sell the coins.

From this point of view, the platform will not lose money at all, and this model has almost no risk control.

How do these digital currency lending platforms make money?

Its founder Luen once revealed that MakerDAO makes a profit of US$12 million a year through lending services, while its cost is only US$200,000.

DeFi outbreak

In the thousands of years of human lending history, this is the first time that such a low-cost lending model has appeared. Today, the loan amount of MakerDAO has exceeded 80 million US dollars.

With MakerDAO as the center, the wave of DeFi is slowly emerging...

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DeFi outbreak

After the lending market is formed, what kind of market will DeFi form?

On the MakerDAO platform, after mortgaging digital currency, you cannot directly obtain fiat currency, but will obtain a stable currency Dai that is anchored to the US dollar.

Many people may ask, why does MakerDAO not directly give users legal currency, but create another digital currency?

In fact, MakerDAO has great ambitions. They want to be a "central bank" in the field of digital currency and issue a currency that is widely used.

After they issued Dai, many people began to do derivative projects on Dai, such as financial management.

Take Compound as an example. On this platform, users can deposit their various digital currencies, such as ETH and Dai, and earn interest.

Compound’s current funding has exceeded $150 million.

We can see that MakerDAO can mortgage assets and issue a currency-like stable currency, which is equivalent to a "central bank"; while Compound can manage money, which is equivalent to other "banks".

Issuing currency, lending, and wealth management, the three core functions of traditional banks, DeFi already has.

In addition, the territory of DeFi is still expanding. Stable coins, derivatives transactions, etc. are also emerging in an endless stream.

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DeFi ecological panorama (Source: The Block)

The rise of this ecology has also made V God, the founder of Ethereum, very happy.

Because the current digital currency lending is mainly in ETH. After the ICO ebb, Ethereum is expected to turn around again by relying on DeFi.

At present, it is conservatively estimated that the number of global currency holders is 60 million, and the number of people is still increasing by tens of millions every year.

These groups of people may become users in the field of digital currency lending.

The total assets of digital currencies have reached 223.6 billion U.S. dollars, equivalent to 1.5 trillion yuan.

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Global digital currency market value trend chart (2017-2019)

When a market has a scale of trillions and the number of people has tens of millions, we may no longer be able to ignore it.

A new financial system came quietly.

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revolution and integration

In the eyes of DeFi players, the financial system they first hit is actually Internet finance.

Borrowing and financial management in the field of digital currency are all completed in real time through smart contracts, truly achieving "peer-to-peer".

"Therefore, there can be no capital pool in the field of digital currency." A founder of a DeFi platform said.

But in the eyes of many traditional financial practitioners, DeFi, the so-called "financial revolution" that emerged in Silicon Valley, seems to be just a farce.

"MakerDAO's financial services may be interesting." Richard Bernstein, former chief investment strategist at Merrill Lynch, said in an interview with Bloomberg, "But they don't know anything about financial history, and their ideas are naive." It shocked me deeply."

“They are full of ambitions to disrupt everything, but they have no idea why financial regulation exists,” he commented.

What is the problem with DeFi today?

Although it seems that there is no risk control problem in the MakerDAO model, the huge fluctuation of the currency price will also break down this model.

In the field of digital currency, a 30% plunge in one day is not a novelty. Once there is a black swan event such as the sudden plunge of ETH, MakerDAO may still "crash overnight."

Because when the price plummets, the platform wants to sell the mortgaged Ethereum in a concentrated manner, so that there may be a large-scale smashing of the market, and even if they think of it, they will not be able to get it out.

The end result is to accelerate the destruction of Ethereum.

After this model becomes bigger and bigger, the systemic risk will also become bigger and bigger.

"It's like organizing a dinner. It's very easy for two people to make an appointment, but it's not a simple multiplication of difficulty to organize 200, 20,000 or even 2 million people to eat at the same time." A financial practitioner pointed out.

At present, within DeFi, there has been differentiation.

Some DeFi fans believe that the ultimate goal of DeFi is to establish a "digital currency utopia" that is not controlled by traditional financial giants.

They want to be fully decentralized and build a fully decentralized stablecoin system.

The other group of people believes that if DeFi wants to land, it must embrace traditional finance.

"MakerDAO relies on existing jurisdictions and central banks." As one of the representatives of the DeFi community, Ruen has publicly stated on many occasions since this year, "We will not undermine or challenge the authority of any government or central bank."