Jointly produced by Tongzhengtong Research Institute × FENBUSHI DIGITAL

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Special Advisors: Shen Bo; Rin

DeFi has gone through the transformation from "serving the financial industry" to "revolutionizing the financial industry".

The concept of DeFi is hot, and the financial industry is the key development direction of blockchain technology applications. The recent outstanding market performance of top projects has made "DeFi" more popular.

Finance is the core of the modern economy and can be divided into four categories: monetary and financial services, capital market services, insurance, and other financial industries. The corresponding financial intermediaries are banks, securities companies, insurance companies and trust companies.

DeFi and finance/financial intermediaries can complement each other. The undifferentiated but conditional access of DeFi may further expand the coverage of finance; DeFi adopts blockchain technology, which can improve the transparency of transaction data, ensure the irreversibility of transactions and a certain degree of censorship resistance, and prevent the malicious inflation of regime subjects. have certain advantages.

But DeFi and finance are helpless in covering all users. In addition, DeFi inevitably faces risks in technology and landing applications.

Since the emergence of the DeFi concept, there have been thousands of eligible blockchain projects, most of which focus on the issuance of tokens, financing, transactions and related financial instruments.

The blockchain project MakerDAO has the functions of issuing stable tokens and mortgage financing, and initially has the prototype of a "token bank". However, the issuance mechanism of MakerDAO tokens has a single function, and its role in empowering the real society is doubtful, and there are volatility risks and liquidity risks.

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1 The ambition of DeFi

1.1 DeFi: From improvement to revolution

1.2 The popularity of DeFi is gradually increasing

2 Win-win cooperation is better than competition between two strong players

2.1 Finance is the core of modern economy

2.2 DeFi and Finance/Financial Intermediary: Complementary Advantages and Disadvantages, Coexisting Disadvantages

3 Summary

3.1 There are a large number of DeFi projects, with the ETH public chain as the main position

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1.1 DeFi: From improvement to revolution

The concept of DeFi has undergone iterations and has gradually evolved from the initial "financial improver" to "financial revolutionist". Blockchain technology has begun to transform from serving finance to reshaping finance.

Brendan Forster has made a basic definition of DeFi: DeFi is a decentralized financial platform community, and projects in the community need to meet four conditions, "using blockchain technology, serving the financial industry, open source code, and having a certain scale of developer groups ". According to the above definition, Brendan Forster sorted out the DeFi projects based on the ETH public chain. Brendan Forster's definition of DeFi is still extremely influential so far.

After entering 2019, benefiting from the continuous improvement of the blockchain industry ecology, the industry has expanded the connotation and extension of DeFi: the movement of using open source software and decentralized networks to transform traditional financial products into trustless and transparent protocols. Accordingly, DeFi includes not only open source blockchain projects based on the ETH network that serve the financial industry (or provide financial services), but also include Bitcoin, Stellar, etc. that issue tokens and are used for payment and settlement.

1.2 The popularity of DeFi is gradually increasing

The blockchain may become the matrix of new concepts such as "DeFi". Bitcoin has only been produced for ten years, and the term blockchain needs to be updated. For example, after the emergence of the "Internet", many concepts and vocabulary based on Internet infrastructure or applications spewed out. The concept of "blockchain" is very likely to become the matrix of "new concepts" in this field in the near future. There was Decentralized Finance before, so it is not surprising that new concepts such as Decentralized Education (distributed education), Decentralized Storage (distributed storage), and Decentralized Communication (distributed communication) will appear in the future.

The financial industry is the key development direction of blockchain technology applications, and more than one-third of blockchain projects can be classified as DeFi. Based on the academic definition of finance, and according to the BICS (Blockchain Industry Classification Standard) classification, at least 38% of the top 1,000 tokens in the current market value directly serve the financial industry, including non-bank financial , Wallets & Transactions, Token Asset Management, Stable Tokens, Banking Services and Payment Settlement.

The token market structure has been basically formed. Compared with direct competition with leading blockchain projects, innovation based on the existing structure is an easier "track". The emergence of the concept of BTC and blockchain has been a decade of ups and downs. So far, the market value of the top 20 mainstream tokens represented by BTC has long accounted for 88%-90% of the total market, and the ranking is relatively stable. The blockchain projects represented by these tokens are distributed in the fields of payment and settlement, operating platforms, banking services, wallets & transactions, stable tokens, and token services. Innovation based on the existing market structure can not only avoid direct competition with these leading projects, but also enjoy the accumulation of native users, which is a "win-win" choice.

2.1 Finance is the core of modern economy

Finance refers to the circulation of value across time and space, and is the core of the modern economy. Finance in a narrow sense refers to the intermediation of monetary funds, various forms of credit activities centered on banks and currency circulation organized on the basis of credit. In a broad sense, finance is a vertically and horizontally intersecting, internally and externally connected, multi-dimensional, multi-level three-dimensional system. It is a huge system composed of various elements that restrict and interact with each other.

Financial intermediary is the inevitable product of commodity economy and financial development. According to the People's Bank of China, the financial industry can be divided into four categories: monetary and financial services, capital market services, insurance, and other financial industries. Corresponding financial intermediaries can be divided into banks, securities companies, insurance companies and trust companies, etc., which respectively undertake the needs of social and economic development in currency issuance, payment, financing, investment, information transactions and risk transactions. With the gradual formation of commodity economy, currency and credit relationship, financial intermediary emerged spontaneously. In order to meet the social and economic payment needs, early financial institutions mainly focused on currency deposit and exchange. When financial intermediation becomes a high-frequency economic activity, both the supply and demand sides need specialized institutions to provide financing services for them, and banks, the financial intermediary of deposit and loan, emerge as the times require. With the development of the economy, on the one hand, the government and enterprises have long-term capital needs, and on the other hand, the accumulation of social currency has gradually increased, and individual investment needs have been stimulated. After the popularization of credit relations, various forms of credit, and the emergence of joint-stock companies, investment needs and technical service needs related to securities such as bonds and stocks emerged, and investment financial intermediaries emerged. With the gradual expansion of the financial market, its complexity and specialization are getting higher and higher. In order to reduce the cost of information collection and improve the efficiency and accuracy of decision-making, information-based financial intermediaries have begun to appear. Along with the progress of the social economy, the awareness of risk prevention has gradually sprouted, and financial intermediaries for insurance have emerged as the times require.

2.2 DeFi and Finance/Financial Intermediary: Complementary Advantages and Disadvantages, Coexisting Disadvantages

Compared with financial/financial intermediaries, DeFi has its own advantages and can complement each other to a certain extent to achieve a "win-win" situation. DeFi advocates undifferentiated but conditional (conditions for assets) access. The adoption of blockchain technology ensures high transparency of transaction data, irreversibility of transactions and a certain degree of resistance to censorship. Finance and financial intermediaries have a long history, with a deep social foundation and a wide range of people covered (based on credit and risk control).

Undifferentiated but conditional access to DeFi may further expand the coverage of finance. As far as the current development status of the industry is concerned, in addition to the threshold of user education for the entry of DeFi, what is more important is the review of user assets by DeFi (such as MakerDAO). And use DeFi. Finance continues to evolve along with the development of human society, and has a deep social foundation and a wide range of people covered. There may be a high overlap between DeFi users based on token assets and credit-based financial users, but theoretically there are still DeFi users that have not been covered by traditional finance.

In terms of user access, both DeFi and finance have the disadvantage of insufficient coverage. In addition, in view of the status quo of industry development, DeFi also faces the disadvantages of technical risks and doubtful applications. Although traditional finance has been around for a long time and has penetrated into all aspects of social life, certain social groups still cannot enjoy financial services based on credit and risk control. However, DeFi's user access based on token assets has excluded most groups at this stage. Technical risks and landing applications are the risks faced by the entire blockchain industry, and DeFi is inevitable.

3.1 There are a large number of DeFi projects, with the ETH public chain as the main position

Since the concept of DeFi came into being, there are currently thousands of eligible blockchain projects. According to Github, DeFi can be divided into decentralized exchange protocols, stable tokens, loan agreements, derivative agreements/prediction markets, etc. According to the classification standards of the financial industry, DeFi can be re-divided into: monetary banking services (such as issuing stable certificates), non-monetary banking services (such as loan agreements), securities industry financial services (such as classified exchange agreements, derivative agreements/prediction market , bundle agreement, fund agreement), other financial services not included (such as tokenization agreement, KYC/AML/identity authentication, application/tool, analysis, others). It is obvious that at this stage, DeFi is mostly concentrated in the fields of issuing tokens, financing, trading and related financial instruments.

The number of DeFi projects deployed on the Ethereum public chain is the largest. On the one hand, because the Ethereum public chain appeared earlier and was the first public chain project to support smart contracts, it became the first choice for developers of early DeFi projects. On the other hand, Brendan Forster, the creator of the DeFi concept, is the co-founder of Dharma Labs, and the project is also developed based on the Ethereum public chain, as is the most dazzling MakerDAO.

3.2 The Pioneer of "Token Bank": MakerDAO

The blockchain project MakerDAO has the functions of issuing stable tokens and mortgage financing. From the perspective of financial emergence and historical progress, it has initially taken the prototype of a "token bank".

MakerDAO can issue the stable token DAI, which is issued by the over-collateralization of the token and maintains a 1:1 anchor with the US dollar. It is by far the largest decentralized stable token. MakerDAO operates based on the ETH network. DAI is its internal stable token. There are two ways to issue it: one is that users can use the smart contract of the Maker platform to mortgage the ETH token they hold to create a CDP (Collateralized Debt Positions , mortgage debt position), and then the holder of the CDP account can generate the stable token DAI within the amount supported by the collateral. The other is to use legal currency to buy and sell DAI through the OTCMaker digital token trading platform.

MakerDAO meets the financing needs of investors. In the traditional financial field, due to the requirements of risk control, financial intermediaries such as banks have strict restrictions on the financing of small and medium-sized enterprises and individuals. One of the issuance methods of DAI is to create CDP by mortgaging ETH. Theoretically, as long as you own ETH, you can obtain a certain percentage of financing through MakerDAO, which is used to expand income or hedge risks. According to official data, as of the end of April 2019, more than 2.3 million ETHs have been locked in Maker's smart contracts, and the total supply of DAI has reached $83.07 million.

In the current financial system, banks occupy an important part. They may not only bear the heavy responsibility of issuing currency according to national policies and economic operations (such as the Federal Reserve), but also participate in the regulation of macro and micro economies, the construction of social credit systems, and the supervision of society. Economic performance and other functions. Compared with banks, the issuance mechanism of MakerDAO tokens has a single function, and its role in empowering the real society is doubtful. MakerDAO is likely to expand its functional mechanism in the future.

MakerDAO has volatility risk and liquidity risk. In the MakerDAO system, one of the ways to generate DAI is to mortgage ETH tokens. The current token market is highly volatile, and an intraday amplitude of 10% is not uncommon. Therefore, theoretically, there is a sharp drop in token prices that leads to insufficient collateral. Circumstances covering the loan amount. Since MakerDAO currently only supports the pledge of ETH tokens, and since 2019, the ETH locked in the MakerDAO system has increased significantly, from more than 2 million in March to 2.3 million in April, which will affect the ETH market in the long run fluidity.

3.3 DeFi: the master of the "code world"

The blockchain technology adopted by DeFi has the characteristics of traceability, immutability and high transparency, which is a useful supplement to the current financial industry. In the later period, with the maturing of DeFi and the iteration of blockchain technology, DeFi will play more and more important roles, and even the financial system that will dominate the future "code world" is unknown. However, as far as the current development of the industry is concerned, social needs, public chain performance, and user education are all "blockers" on the road to DeFi development.

Whether it is a real pain point or a false demand, it is not yet possible to draw a definite conclusion. Take stable tokens and token transactions as examples: In the field of stable tokens, the recent USDT incidents have continued to ferment, and the issuance of decentralized stable tokens will undoubtedly enhance investors' confidence; in the field of token transactions, such as non-centralized The centralized trading platform, no matter in terms of user base or performance, does not yet have the strength to challenge the centralized token trading platform.

Public chain performance is one of the development bottlenecks. At present, the vast majority of DeFi projects are developed based on a few public chains. As far as the current technical iteration is concerned, most public chains do not support high TPS, which will undoubtedly limit DeFi, which requires high transaction rates. Deployment of class projects.

Due to some reasons, some nouns in this article are not very accurate, mainly such as: general certificate, digital certificate, digital currency, currency, token, crowdsale, etc. If readers have any questions, they can call or write to discuss together.

Note:

Due to some reasons, some nouns in this article are not very accurate, mainly such as: general certificate, digital certificate, digital currency, currency, token, crowdsale, etc. If readers have any questions, they can call or write to discuss together.

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