"Don't try to understand it, feel it."

When the movie "Creed" was released in China, it was a high point of this round of Defi wave:

• Sushi based on Ethereum labeled YFI, which has just been popular for a month, as "classical Defi";

• Various vegetable coins based on TRON will welcome the sunshine of Justin Sun, and Ontology will also list the first Defi coin;

• EOS also played Defi with Whale Exchange, a "decentralized exchange" that requires mobile phone registration and KYC.

secondary title

There is a concept in "Creed" called "pincer offensive", which is considered to be the driving force of time reversal, that is, there are a group of people who are active in positive time and a group of people who are active in reverse time in the world at the same time, and all the events we experience , are already the result of these two groups of people acting at the same time and wrestling with each other.

In fact, in the secondary market, whether it is stocks, commodities, foreign exchange or the currency circle, as long as the transaction is based on the order book model, the same is true. There will always be multiple armies and air forces in the market. All the ups and downs and price fluctuations we experience are the result of simultaneous actions and mutual struggle between multiple armies and air forces.

In the Defi world, the order book model has been abandoned. The "Automated Market Maker" (AMM) pioneered by Uniswap has become the mainstream in DeFi. In fact, this model has been practiced by Bancor, Eos Ram, and Fomo3d before. Compared with it, the innovation of Uniswap model is that currency holders can participate in the addition of capital pools.

Compared with the order book model, the AMM model is naturally suitable for retail investors.

Under the order book model, the pricing of a transaction is determined by the collision of about one-thousandth of its total plate. As long as there is a sufficient proportion of concerted actors (or called dealers, the main force), the buying and selling of public chips can be manipulated. When the main force is pulling the market, the buying behavior of retail investors is accelerating, and it must be intervening at a high speed in the later period.

When the main force with 30% of the chips is smashing the market, the retail investors with 70% of the chips may not put their chips on the "buy/sell" market to contribute liquidity and pricing because they are at work, watching movies, or having lunch. . After getting off work, watching a movie, and eating a meal, I found that it has fallen by 20%, so I can bear it, and it fell again after a while. Illusion, and then a new low price in a week. Repeatedly like this, the retail investors finally suffered a lot in the low position, and returned the chips to the main force.

And AMM has brought great changes to this situation:

• First of all, the gap between the price influence of retail investors and the main force in the market has been greatly reduced, leaving only the gap in quantity. Because retail investors automatically make markets with the help of machines, whether they are at work, watching a movie, or eating, coins provide liquidity on the chain. The influence and kinetic energy of big investors' timing of smashing orders have been weakened;

• Secondly, the mutual assistance between Uniswap and retail investors has successfully made its trading experience comparable to that of the three major exchanges. Think about how much the three major exchanges have pumped up retail investors and how much money they have spent on professional market-making teams to reach this level;

• secondary title

Those who criticize "Creed" have a point of view that watching movies is for fun, why should it be so complicated and let the audience think so much. Why do you need to understand anti-entropy, positron and other theories to understand a movie. Similarly, many people also wonder why investing in Bitcoin requires understanding private keys and the Byzantine generals problem; investing in Ethereum requires understanding smart contracts and so on.

But the reality is that the more new something is, the less it can be described with a simple story in the absence of data. Most of the new things are also based on the combination and improvement of past technologies.

The story of Defi is very complicated, so complicated that it can find clues from the origin of the credit system of modern finance, so complicated that because it develops too fast, most of the content in "How to DeFi" published by coingecko in March 2020 is outdated. No one can fully understand the present of such a living system and know little about its future unless it understands its past.

In the past, the inside of the currency circle was a game market with only exchanges and transactions. The paradigm of blockchain is "fat protocol, thin application", so it cannot capture cash flow like Internet apps in the past, and can only realize value by rising currency prices. The root cause of the rise in currency prices is that the system functions of this protocol are becoming more and more perfect, unique, and easy to use. Therefore, in the process of development, whether it is a project party or a large currency holder, they will encourage some people to develop, improve, and create new things for the protocol through investment and subsidies.

At this time, for large currency holders, there are two options:

One is to hitch a ride by faith, put the coins in the wallet, don’t care about anything, and then sell them for a few years;

Of course, the development of a project cannot rely on free riders, but active large investors will also encounter serious bottlenecks:

One is as the difficulty of innovation increases.

The deeper the innovation, the more it needs the participation of big projects and star teams. The amount of funds raised began to increase, and the expected return began to be strict. The uneven distribution of tokens brought about by the first round and the second round of the traditional financial market also began to appear. The project began to be popular, which squeezed the survival and development of small teams. "Why do things if the team can issue coins and cut leeks", the atmosphere of innovation in the entire market is frustrated;

The second is the trial and error and destructiveness of innovation.

The former means that a large investor may have invested in 20 teams, and then one of them will make it out, but it will cause the failure of the remaining 19 teams, and the investment will be in vain. The latter means whether to invest in "protocol disruptors", such as a large number of "Ethereum Killers", "Ethereum Subversive" projects that start raising funds in Ethereum, as a major Ethereum investor, do you want to participate? According to the traditional market, of course you have to participate. Yahoo missed Google and Microsoft missed Facebook. But like in 2018, EOS raises a large amount of ETH every day, and on the other hand smashes ETH to pull EOS, which is very offensive.

After the game, the active big investors began to become more and more conservative, because their activism in the later stage caused a death spiral, entering a state of "investing is looking for death, not investing is waiting for death". Later, no matter whether it is the IEO led by the exchange or the offline fraudulent MLM, the status quo without Alpha can not be changed: when it is rising, everything you buy will rise, and when it is falling, everything you buy will fall.

Changing that will require credit markets to function, as has historically been the case.

image description

An example from Lombard Street demonstrating that credit lowers the price of goods

In the currency circle, the biggest problem of the early credit Defi is to pledge A currency to earn A currency, so its currency price will still fall into an upward and downward spiral. Even if it is a stable currency, intermediaries such as exchanges and wallets get the pledged currency to do exchange arbitrage, perpetual contract charging rate, OTC price difference, etc. Not only the income is not high, but the funds have not flowed to the bottom of the currency circle other assets, so the interest rate given by the market is not high.

After the emergence of Uniswap and the improvement of the market mechanism, the money has a new place to go.

Here we must first understand liquidity mining, the second pool, governance tokens, and the chemical reactions brought about by the combination of the three.

• Liquidity mining (yield farming)

Overseas, it is believed that the instigators are Synthetix, Compound, and Balancer, but in China, everyone is more familiar with Fcoin. Everyone provides services for a project and gets the system's own tokens as incentives. Now that the Ethereum synthetic asset technology has matured, people can obtain LP tokens as rewards for providing liquidity on Uniswap, and then use LP tokens as pledges in exchange for liquidity mining rewards from other projects.

The core indicator of liquidity mining is the lock-up volume (TVL). Liquidity mining achieves fair distribution in form. Those who support a certain currency mining, as long as the large currency holders are willing to participate, they can give away a bunch of new currency for free, and retail investors can also mine. There is no such thing as POW that requires a lot of real world Upfront venue expenses.

• Nichi

The AMM fund pool of the project party's own token and mainstream currency (usually ETH) is called the second pool. Usually, the project party will give high multiple incentives to the participants of the second pool, similar to staking, but different from staking, the moment AMM is added to Uniswap or Balancer, the mined token has a price.

Once the token has a price, there will also be an automatically calculated mining annualized income (APY). Because the circulation of the token was small in the early days, and mining has just started, the amount of tokens participating in the second pool is not large. However, the rewards of the second pool are generous, and there will be an "illusion" of short-term low-cost and high-yield. Therefore, only on CMC and Coingecko can you see the annualized 1000% second pool everywhere.

image description

The currency price can achieve low-cost skyrocketing and plummeting on Uniswap only by relying on the second pool

The existence of the second pool is actually beneficial to retail investors and not conducive to large investors.

For large investors, if they buy, the early AMM pool is still small, which leads to large transaction wear and tear, and the gain outweighs the loss. If it is selling, due to the fixed product curve of AMM, the more you sell, the slower the price change will be. And if it is for liquidity, large investors are not willing to put too much currency, because if the currency price rises in the future, their own currency in the fund pool will be reduced due to free losses.

For retail investors, if they are very optimistic about this project and feel that the current currency price is low, they can directly buy it in AMM. During this process, the transaction wear and tear will deduct a few hundred yuan at most. And if you feel that the currency price is high, then go to the second pool to mine the currency efficiently.

governance token

• governance token

Governance tokens are a continuation of Dao’s philosophy. Currency is power. Some projects can vote as long as they have coins, and some need to hold coins to a certain percentage. The existence of governance tokens is good for large investors and not good for retail investors.

When the big players get a lot of this part of the currency for free and at the same time approve it, they will launch proposals that are conducive to increasing the market value of the project, such as expanding the second pool, or uniting with other project parties to make other mining support the currency, Or support other coins to mine this project. The recent case is that the CEO of FTX mines a lot of Sushi, and then votes on Sushiswap to use his own project SRM to mine Sushi. The other is Tron’s Pearl. After listing on the exchange The team started promoting Pearl to mine Salmon.

At this time, going back to the beginning of this section, in addition to digging in person, the big players have a new choice for the rest --- machine gun pool. Represented by YFI, it automatically helps funds select a fund pool for "digging-withdrawing-selling", achieving an annualized "medium" return of 20%-50%, but it is still far greater than the individual funds provided by centralized exchanges and wallets in the past. Double-digit borrowing income, as well as financial management with close to zero interest rates in the reality of developed countries.

• cycle

Mining + Second Pool + Governance Token + Machine Gun Pool, realizes that the project party can concentrate more on the project, without publicity, real name, or capital platform. The price of the currency is soaring and plummeting at close to zero cost without being responsible . The sharp rise and fall of the currency price attracts speculators to trade. The low liquidity in the early stage is suitable for retail investors to sell large investors, and the high liquidity in the later stage is suitable for large investors to sell retail investors. A large amount of ETH was withdrawn from the centralized exchange by large investors, and invested in a large number of new projects with an annualized rate of 1000% in the second pool. Only part of the ups and downs were taken to meet the annualized income requirement of 20%-50%.

In today's new stage, the currency circle realizes a big cycle within the circle.

For retail investors, "speculation is as old as a mountain", they hope to double in three days, five times in ten days, and are not interested in a hundred times in five years, and ten times in three years. Defi realizes the demands of retail investors;

For large investors with faith, they hope that the corresponding team behind the assets will continue to act, their careers will continue to progress, and they will accept large investors to participate in governance. They are willing to be friends with time, adhere to the asset standard, and are not interested in price fluctuations. Defi has also fulfilled the demands of large investors.

References: