This article is from the text version of the keynote speech at the Global Financial Technology DEFI Summit on October 31.
Cai Kailong: Hello everyone.
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the nature of finance
I used to teach finance undergraduates at American universities. After teaching for many years, I summed up finance in one sentence. People who are not familiar with finance should actually understand the general nature of finance as long as they remember this sentence. The essence of finance can be condensed into: The exchange of utility and risk in time and space. Let me explain. We all say that there are two important things in finance. One is return and risk. The greater the risk, the greater the return. The return has different utility for everyone. For example, investing in stocks may have a higher return, and investing in the currency circle may have a higher return. Everyone has different requirements for returns. 10% may be high for you, but 10% may be very low for me. So I changed the relationship between risk and return to risk and utility. Economics is the study of the utility of these things to you. So when we do finance, we are actually doing an exchange between risk and utility, on two latitudes, one in time and the other in space.
The essence of finance is condensed to an abstract level. Let me give you some examples. For example, we say that we store money in the bank. What kind of exchange between utility and risk is this? You put RMB in the bank, what do you get? Get a fixed return, that is, a deposit, with an interest rate of 2% or 3%, and then pass the risk on to others (note, this risk is negative). The central bank takes the money away, invests it, and gives you the return. It is a very simple exchange of risk and utility in time and space.
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Financial System: Centralized vs Decentralized
How can these essences of finance be realized? We need a financial system, a financial system that ensures financial stability. What is necessary to ensure the stable operation of the financial system? This exchange is real, this exchange is fair and effective.Without a financial system that guarantees a true, fair and effective financial system, this financial essence cannot be realized, whether it is centralized or decentralized. So let's take a look at what kind of institutions are needed in the centralized financial system, what kind of measures or ways to ensure that when we exchange utility and risk in time and space, it is true, effective and fair.
For example, we have KYC, such as banks to ensure that money will not be lost. For example, we have a contract. When we make a contract, we have to sign the contract. We must have a lawyer and a court. If you have a dispute about the contract, you can go to the court. If it is not enforced, the public security police will enforce it. This is to ensure the fairness, authenticity and effectiveness of the transaction. This is the traditional financial system.
For another example, if you have a lot of assets and stocks, where do you put them? It is impossible to put them at home, in case the house is stolen, in case others do not recognize these stocks, so you will put the stocks in the custodian center, which is our Shenzhen and Shanghai stock trading custodian center. It is to ensure that equity transactions are true, fair and effective, which is also the traditional centralized financial system.
Another example is securities companies, investment banks, and even the central bank. This is what the centralized financial system must have when we exchange utility and risk for us. This is centralization. But we have to look at another way. I just said that as long as a financial system achieves its goal, there are many ways, and all roads lead to Rome. So there is such a traditional centralized financial system in the real society. Let’s take a look at our other One system is called the DeFi decentralized financial system.
In our decentralized financial system, the code we follow is the law. There are no courts and no police. The code smart contract automatically executes all relationships and exchange rules. This is the core point of DeFi, Code is the law, At the same time, it is open and transparent, creating a kind of trust without supervision or government endorsement, and it has naturally become a trading mechanism that everyone believes in. At the same time, cryptocurrency is used as the medium of value transmission. Although the decentralized system is different from the centralized system, the function is the same, which is to ensure that the exchange of risk and utility can be fair, true and effective.
Think about what objects can be guaranteed to be fair, true and effective? Not all objects can be guaranteed. For example, agreeing on what time, quarter, or a few days, next month or next year's transaction, such as agreeing on which coffee shop to do the delivery this afternoon,These objective objects can be guaranteed because there are objective standards. However, the risk and effectiveness of subjective things cannot be guaranteed to be true, fair and effective.,Why? Because everyone has a different experience with this risk and utility. Everyone has a different experience of this risk and utility standards, and only then will there be transactions. For example, I sell you Bitcoin for more than 9,000 US dollars now. I sell you bitcoin, you buy bitcoin, why? It's because I think Bitcoin has already reached a very high point, and you only buy it if you think it will rise, right? That's why transactions happen. If we all think that Bitcoin will definitely rise, we must keep it all the time, and it must not be available in the market. Therefore, market participants must have subjective interpretations of objective objects with different utility and risks, so that transactions can occur in the market.
Just told our teacher Li, he said that the consensus of SB is also a consensus. There is a joke that when the market fluctuates greatly, a group of people enter the market and a group of people leave the market. When they look at each other, they think that the other party is a SB. This is because everyone has a different understanding of utility and risk, which is why financial transactions occur.
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DeFi and Inclusive Finance
After understanding the purpose of the financial system, let's move on: what is the meaning of a decentralized financial system? What is the use? Decentralized finance is very suitable for inclusive finance. Everyone is familiar with inclusive finance. Countries around the world are promoting inclusive finance. The requirements for inclusive finance are very simple, one inclusive and one beneficial. Pu means more users, and Hui means cheap. To be able to achieve inclusive finance is to be able to achieve many and cheap users, and to be able to achieve a true, fair and effective exchange of risks and benefits.
Can DeFi do it? It is absolutely possible, because the barriers to entry are very low, and you don’t need to be a super big customer to use DeFi. As long as you go online, you can use DeFi as long as you buy a little bitcoin, digital currency, and Ethereum. The whole system is reliable, transparent and open. I don’t need to explain this, because the actual application of the blockchain is very transparent and open. No counterparty risk, this is not difficult to understand. Our contract is a smart contract, the code is the law, and the assets are all on the chain, so there is no way for the counterparty not to execute it. When the smart contract is automatically executed, the assets on the chain are automatically executed. convert. So DeFi is a financial technology method that I think is most likely to realize inclusive finance. Although the volume is still very small, although it is still in its infancy,But if it is developed, it is the most likely way to achieve inclusive finance.
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The market prospect of DeFi
Expectations return to expectations, and we return to reality. Let's take a look at how big the DeFi market is now. I found this three days ago and four days ago. At present, the amount of DeFi locked in the entire Ethereum system is 540 million US dollars, which is roughly the current market size. We may add EOS to a total amount of no more than one billion US dollars at most, and the current market size is about this order of magnitude. In a while, the market size in the research report released by the currency world is similar, about one billion US dollars.
How big do you think the theoretical DeFi market is? Think about it, how big can DeFi theoretically be? In fact, I did the math for you, and the figure came out to be 1.8 trillion U.S. dollars.The theoretical market is a $1.8 trillion marketDeFi ecology
DeFi ecology
Why is DeFi still so small now? We can take a look at the current ecology of DeFi, because everyone will discuss the entire ecology in detail in the morning and afternoon and the next few guests, so I won’t go into details. Payment, asset management, prediction market, KYC, derivatives, insurance, and lending are all subdivisions of the entire ecology. The lending branch is currently the hottest, as are exchanges, I mean decentralized exchanges. If you are involved in DeFi, you should be familiar with this. If you are new to digital currency, you may not understand a lot, and there are many uses that you have never used.
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Problems in the development of DeFi
The DeFi ecology looks so complete, but the volume is so small, why? Because of several main reasons, that is, some of the development problems of DeFi that I want to talk about. If DeFi can overcome these development problems, the future prospects are very good, but these objective obstacles still exist.
The first one is that the number of users, activity, liquidity, and transaction depth are far from enough.Not to mention the comparison with traditional finance, it is much worse than the corresponding centralized model in digital currency. For example, in the field of decentralized exchanges DEX, like Huobi and Binance are centralized exchanges, the depth, breadth and activity of transactions are several orders of magnitude beyond DeFi DEX.
To give an example, MakerDAO is currently the largest DeFi lending project, with only 2,000 daily active users, which is very small. Even a digital currency exchange may have a daily activity of 20,000, usually 35,000, or even hundreds of thousands. When the market was hot a few days ago, there were hundreds of thousands. At present, there is no objective evaluation of DeFi user data in the market. A while ago, MakerDao introduced more than 20,000 users when it was doing coinbase marketing, so we estimate that the total number of MakerDao users should be around 50,000 to 80,000. Then the research report to be released by Coin World said that the total number of DeFi users is estimated to be 130,000. I think this figure is quite reasonable. According to this figure, there are currently only 130,000 DeFi users, and the market is still very small.
Then another example, there is a prediction market Dapp called Veil in the color map ecology that was released just now. It has survived for six months and just stopped operating. Small. I believe that no one here has used this APP except me, because the number of 310 users is too small.
There are several reasons why the market is not big enough,One of them is relying more on Ethereum, because Ethereum's smart contracts are very easy to use. So at the beginning, everyone used Ethereum when developing DeFi, and gradually EOS started to use EOS. But it is not enough, because the number of users of Ethereum itself is much smaller than that of Bitcoin, and even less of EOS. In the round table forum session in the morning, Uncle Dong and I talked about the need for DeFi to cross-chain, and DeFi assets need to be cross-chain, not only cross-chain, but also to Bitcoin, to other mainstream currencies, and to get in touch with real-world assets. Only by being able to go to the chain can it be possible to solve the biggest problem, which is the problem of insufficient users and low activity.
Excessive reliance on Ethereum will cause the throughput to be limited by Ethereum. Ethereum is now 1.0. At the stage of development, V God has given up. To launch 2.0, I feel that 1.0 cannot be expanded and cannot provide more throughput. , so V God wants to push 2.0. But 2.0 has many synchronization problems and fragmentation problems. It is difficult to transplant what is currently being made to 2.0. The design system of 2.0 is completely different, so DeFi will inevitably be affected by the upgrading of the underlying technology. It is estimated that many entrepreneurs doing DeFi now should be affected by the upgrade of Ethereum.
The third problem is that the product user experience needs to be improved.We are also discussing this issue at our morning round table. I believe that everyone here who has used DeFi will definitely find it too troublesome to use DeFi. You have to register first, and after registration, you have to connect this wallet, install several apps, and move this currency. This user experience It's not like what Internet people do at all. Internet people want to achieve the ultimate user experience. This user experience is far from the ultimate, and it is really cumbersome. The user experience of DeFi needs to be improved.
There is not enough cross-chain agreement,It is the asset cross-chain just mentioned. The advantage is that many people realize that there are not enough cross-chain assets, so there are several DeFi projects that do cross-chain. The stablecoin Dai is based on Ethereum, and MakerDAO will launch a multi-asset mortgage loan in November in order to allow more assets to be on-chain.
In addition, the utilization rate of assets is low, and the main assets are mortgages.In the ecology I just looked at, derivatives, payments, stablecoins, loans, and insurance are actually mainly based on loans, and the utilization rate of funds based on loans is very low, such as MakerDAO is 150%. That is, putting 150 Ethereum can mortgage 100 Dai, which is a relatively low mortgage rate. The utilization rate of funds is still not enough. In the traditional financial system, it can be put very high just now, because it can lend and leverage after KYC verification, but it is not easy in the decentralized system now. Everyone can do DeFi, so the credit and strength of the counterparty to the transaction are completely unknown, so there is no way to put a lot of leverage, otherwise, what should I do if I run away, and I won’t be able to catch up with you. It is not easy to put leverage, which is a problem that the decentralized financial system has to face.
Too few off-chain assets on the chain is also a problem encountered by DeFi. At present, we can only make some DeFi financial products on Ethereum, EOS and even some Bitcoins, which is far from enough. UMA is a protocol that wants to connect any asset in traditional finance to the chain, such as stocks, such as the Shanghai and Shenzhen Index. UMA provides a prediction machine Oracle, which compares the number of points the stock will reach next month with the products on DeFi. Docking becomes the basis of the transaction, and then the method of asset on-chain can be realized in the UMA protocol. There are still very few such UMAs. UMA has just been launched not long ago, and the effect remains to be seen.
The last question that everyone is very concerned about, many media reporters have asked, will DeFi supervision be a problem? Many people think that regulation is a big problem, because regulation is crucial to finance, but I personally think it is not a problem for DeFi,Regulation is not a big issue for DeFi. What is the reason? An example can be given. Some girls say no to running and playing ball, saying that after running, their legs will become thicker and their playing arms will become thicker. I said that if you are so thin, you start to worry about your hands getting thicker before you start exercising. This worry is too much and too early. This is to say that DeFi is worried about regulatory issues, worrying too much too early, and thinking too far.
Why? Because first of all, DeFi is too small, and the entire market capacity is less than 500 million US dollars. Why do you think so far? Supervising so many things, I have no time to pay attention to this new and small field of DeFi. Second, DeFi has not yet connected to legal currency or offline assets, and traditional assets have not been connected. Isn’t it just a currency transaction for supervision? Isn't it just an exchange, the conversion of profit, risk and utility between different currencies, for supervision, it is something that the currency circle plays by itself, and will not affect the traditional economy. So if DeFi has not touched the traditional financial world, if it has not been connected to legal currency, there is no need to consider regulatory issues.
There is another reason why DeFi does not need to worry too much about supervision. The fourth reason is ""the sky is falling and there are tall people supporting it." Whoever is tall is the centralized digital currency exchange. How can digital currency be standardized to decentralization. The advantages of decentralization over centralization are very obvious, open and transparent. All contracts are in code, which is a transparent mechanism. This is easier for supervision. So I think it is too early to worry about the regulation of the DeFi industry at this stage. There is no need to worry about these issues, and it will not become a problem until the user scale, traditional asset access, and centralized digital currency regulation have been completed. This is a good thing , Entrepreneurs don't have to worry about the many restrictions of this and that, and let go of their imagination to try.
This is why I shared with you the advantages and disadvantages of DeFi. I think DeFi is a very good hotspot in the future of financial technology. Although it is still early, many venture capitalists are also paying attention to this area. These are shared with you, thank you all.
Author: Cai Kailong, public account: Kaiping Jinke (it_finance). Financial commentator, senior researcher at the Financial Technology Research Institute of Renmin University of China, former Chief Strategy Officer of Huobi Group and CEO of Huobi America, and co-founder of Internet Finance Thousand Talents Association.
