Editor's Note: This article comes fromEditor's Note: This article comes fromMr. Newton disassembles the blockchain (ID: Mr-Newton)

, Author: Mr. Newton (He Baohui), reprinted with authorization by Odaily.

Zhu Jiaming

In 2009 AD, chemists invented a new element, and at that moment there was one more element in the periodic table.

This change is not because there are more chairs in the house, or more dust in the world.

Rather, this new element will combine with the previous 118 elements to create inexhaustible new species. The whole world has changed.

We call the world after adding one more digit to the periodic table of financial elements, which we call DeFi.

DeFi, or Decentralized Finance, is generally translated as distributed finance or decentralized finance in China, and mainly refers to a financial system based on blockchain public chain technology.

From the current point of view, DeFi is not mainstream, or far from the mainstream. Generally, the DeFi field likes to use the indicator TVL (Total Value Locked, that is, the total amount of funds deposited in the DeFi field) to measure the development of the industry. Today, as the highest point in history, the total locked value of the DeFi field is no more than 1.75 billion US dollars. The figure of 1.75 billion U.S. dollars does not need to be explained, and it is also understood that it is completely unpopular in the traditional financial world.

But it does not prevent this small field from attracting a group of the world's smartest brains to join. In today's lackluster Internet, every few days there will be an innovative project that makes people applaud. Although DeFi is small, it is full of attention.

Including our Token Thinking Lab since its establishment at the end of last year, it has also made heavy bets in the DeFi field. It is also inevitable to be questioned by the team, investors, partners and other aspects:

Therefore, this article sorts out the author's thoughts on his own choice, and shares it with you, and hopes to ignite more DeFi flames on the land of China, so as not to be absent from this wave.

Looking for the basic point of the change of the times - science and technology

Human society, politics, and economic relations are intricate and complex. When we want to conduct relevant analysis, we must extract a thread from them, otherwise we will be lost in the maze. And when we explore the tide of the new era and the rise and fall of business, we must also find an analytical context to divide the generations and find the basis of the changes of the times.

Here, I like the summary of an old friend Zhuge Pili: "Human history is essentially repeated, trendy, retro, combined, and divided. The social phenomena we are talking about today were actually staged hundreds of years ago. , It’s just another time and space to perform it again. Throughout history, there is only one thing that has really changed forward and pushed forward the progress of human society, and that is technology!”

Therefore, when we talk about the changes of the times, we must first understand what the basic point is and which technology has taken a step forward. When we talk about changes in the financial industry and DeFi distributed finance, we must also know what the underlying technology of DeFi has changed, and how is it different from the original finance?

In DeFi, all financial applications are worth redoing

Obviously, the difference of DeFi is the use of blockchain technology.

And how has this changed the financial industry?

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The cost of trust is low enough

In traditional finance, we believe in a recognized subject with high credit, because we believe in this subject, and we believe in the services it provides.

We trust the bank, so we dare to put money in it. For new financial applications, it is difficult to establish trust. I still remember clearly that when Alipay was first born, parents’ worries and resistance, it took nearly three years for them to officially believe and use mobile payment. The difficulty of credit establishment has raised the cost of financial innovation in disguise, so monopoly in traditional finance is more common.

Of course, there are reasons why people can’t believe it. After all, when you want to use a traditional financial service, you are required to trust this financial subject more than your wife, but you don’t have any direct ability to restrict the behavior of this subject. This phenomenon is more common in the field of digital currency where financial regulations are not yet sound. The actual controller of the exchange runs away, and evils such as minting coins out of thin air and smashing the market are everywhere.

The blockchain transitions from trusting specific subjects to trusting codes.

Anyone can see the details of the DeFi protocol and the flow of funds on the chain, and understand that no one can modify this basic rule at will. So that any subject, whether it is an enterprise or an individual, does not have to worry about the evil of the centralized organization when using the DeFi protocol. This also provides a large fertile ground for financial innovation.

The development of any new era has its transition period. We will definitely see horse-drawn carriages and cars driving at the same time on the road, but it does not prevent us from judging at that time that the "road" in 2020 is prepared for cars. In the early days of the DeFi industry, everyone kept developer accounts in order to avoid many risks such as imperfect codes, but this does not mean that this is the future of the DeFi industry.

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Transaction costs are low enough

The DeFi protocol has no entry barriers, disintermediation, and 7*24 hours of continuous operation.

For individual users, we don't need to wait for the lengthy review and operation process of financial institutions, instant feedback, and instant transactions; and there are no intermediate dealers, users directly trade with their opponents, so that there is really no middleman to make a difference.

For enterprise users, taking the above-listed digital currency market exchange as an example, they have to pay an average cost of several million RMB. In the heyday of the industry, there was a sky-high price of more than 40 million RMB. In DeFi, this cost is almost is 0.

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higher security

higher security

In addition to not having to worry about centralized servers and centralized security issues, mainstream open source software often means that it is more secure than closed source software.

Security has always been one of the banners held high in the DeFi industry, but it is also the most criticized. In April this year, dForce was hacked to steal 25 million US dollars, and in June, Balancer was hacked to steal 500,000 US dollars. There are large-scale hacking incidents staged almost every month. What about security?

However, hacking is not unique to DeFi, as long as it is code, it will definitely face vulnerabilities. Hacker attacks in the CeFi (centralized finance) field are not less than DeFi. In May 2019, Binance, the number one digital currency exchange, was hacked to steal 7,000 BTC, worth about 300 million RMB.

To deal with possible vulnerabilities, the usual method of closed-source software is to invest heavily in recruiting security experts and cooperate with third-party security companies to continuously optimize and upgrade itself; while closed-source software is open to everyone, developers, partners, and community members. In terms of the upper limit, there will be more eyes staring and more people submitting code than closed-source software. After long-term continuous supply and bug fixes, it is usually safer than closed-source software.

Therefore, from the perspective of the current DeFi protocols, they are generally in their infancy, and there is still a long way to go before being called "classic" open source software. However, the mainstream DeFi protocol in the future will be more secure than CeFi in terms of mechanism after continuous attack and use.

ecological

We divide the cooperation methods between various financial applications in traditional finance into two categories:

One is cooperation at the product level. I will sell your insurance here as an agent, and you will sell my financial management as an agent there. This type is more common and lighter to implement.

The other type is cooperation at the protocol level. In recent years, Open Bank (Open Bank) has been promoting things at this level, opening up some basic services of banks in the form of APIs, so that third parties can achieve plug-and-play. Before the official launch of Open Banking, the implementation of this kind of cooperation is very important, and often requires the engineers of both parties to go back and forth many times, and there is a long development cycle.

The DeFi protocol has always been called DeFi Lego, because every basic protocol is like an API, without access restrictions, allowing direct calls to each other. This form of calling and combining each other is like building Lego blocks.

Therefore, it is not difficult to find that the technical characteristics of DeFi have solved the problem of cooperation at the protocol level in traditional finance as soon as it was born.

That being the case, why bother to open up traditional finance, why not just redo the financial business in the DeFi world?

We can see that this is indeed happening. For lending, Compound appeared; for transactions, uniswap appeared; for derivatives, Synthetix appeared...

Almost every financial protocol you can think of has been redone in the DeFi world.

On the one hand, for financial organizations, multiple agreements can be connected at the same time to form new financial products to provide to users; on the other hand, for enterprises, after the digital assets tokenized, they can be traded and leveraged , lending and other agreements are free to flow.

There are endless new species emerging in DeFi

If you just move traditional finance to the blockchain, I don’t think it’s enough to call it “an extra digit in the periodic table of financial elements” at the beginning of the article. The sexy thing about DeFi is that it realizes all ideas in traditional finance. I dare not think about it, even if I think about it, there is no way to realize it, a completely innovative new species.

Here I will give an example, Flash Loan in the DeFi field.

In our past history, borrowing must be accompanied by corresponding mortgages. Whether it is a real house or a car, or a credit loan without a physical object, there is essentially a corresponding collateral.

The magic of flash loans is not the quick lending, but the ability to complete large loans without any collateral.

We all know that in the world of public chains, everyone is anonymous and untraceable, so how to guarantee the repayment of the borrower? Why doesn’t he run away with such a large sum of money?

In this way, a risk-free and unsecured large-amount loan is truly achieved, which greatly improves the utilization rate of funds. Arbitrage among many on-chain DeFi protocols is a good use case for flash loans.

DeFi is the most important real implementation in the field of public chain at this stage

For the above-mentioned advantages of DeFi, you may have heard similar remarks when the blockchain was hotly discussed in the past few years. However, in the past few years, the real landing cases have not been seen for a long time. Has DeFi really landed? Why is DeFi the first to land?

Here we first analyze the implementation of the blockchain. In the past year, the implementation of the blockchain has basically been divided into two routes:

A path I call incremental innovation.

The blockchain is mainly used as a database among multiple subjects to reduce cooperation friction between subjects. The current main promoters of this type are local governments, large enterprises, etc. The main application scenarios are supply chain finance, e-government, traceability, etc., and the main technology used is the alliance chain. Judging from our research and practice, the original business has indeed been improved, but the scope of improvement belongs to the category of incremental innovation.

This type of blockchain company, I prefer to mark it as an outsourcing company in the traditional IT field, mainly providing solutions for customers. The author was fortunate to participate in the acquisition of the largest IT outsourcing company in China last year. The price at that time was 800 million, which was not low, but it was the ceiling of that field.

A path that I call disruptive innovation.

It is mainly the road to landing in the field of blockchain public chain, determined to apply blockchain to the whole society and improve production relations. This road has never been taken before. It is very difficult to implement in the early stage of the industry, and it is also an area full of scammers who only talk about theory but not implementation. In addition, the industry has taken some detours during the exploration period in the past few years, and many people have lost confidence in this road.

In the past few years, the main problem was that everyone overestimated the speed of the implementation of the blockchain, so they hoped that the blockchain would completely subvert the traditional Internet. At that time, Dapp and distributed applications were the most popular. However, in the process of practice, it is found that the efficiency of Dapp is much lower than that of app, and many functions are limited and cannot be realized, but there is no obvious gain in effect.

Blockchain is a technology that reduces the cost of mutual trust by reducing single-point efficiency, thereby improving overall efficiency. Therefore, it is unreliable to put all algorithms and data on the chain like Dapp. Not all algorithms and data have a high trust threshold, and there are many algorithms and data that require too much efficiency. High, at this stage the blockchain cannot satisfy at all.

And what needs to lower the threshold of trust most is finance.

Moreover, it is difficult for Dapp to be implemented, and it is also limited by the "hard link" problem of on-chain and off-chain connections. This is not an easy task today.

In the field of finance, financial agreements are completely created by people, so the agreement itself is completely digital and can be easily linked to the chain, or the agreement runs on the chain from the moment of creation. The hard link problem here can be understood as the asset dimension related to the financial agreement, the link problem between the property rights (token) and the asset itself.

In 2018, I specially wrote an article for analysis. The hard link here can be divided into two parts. One is how to prove the one-to-one correspondence between token and asset itself. In layman’s terms, it is how to "prove that your mother is your mother"; How to ensure that the token can complete absolute control over the asset itself. For example, in the real world, you can prove that the vehicle is your vehicle, but after it is stolen, you need the judicial authority to help you protect your rights and complete control over your vehicle.

We will find that to solve these two problems, the asset itself must have two characteristics:

a. Bit assets (assets are entirely composed of bits, such as music, corresponding to atomic assets, which are entirely composed of atoms, such as wheat). Bit assets can also be like a financial agreement, running on the chain from the moment of creation, and its tokens can naturally achieve a provable one-to-one correspondence.

b. Assets must be valuable in a specific network. The blockchain network is completely open and transparent. For bit assets such as novels, although the copyright of the author can be proved, users can read directly without the author's permission and obtain the value of the asset without additional payment, that is, the asset owner's control over the asset. Loss of rights. However, such as assets in social and games, users can fully obtain their value only in a specific network. For example, game props must be meaningful in a specific area, and props with the same attributes and appearance have no value in an area without players. .

To sum up, it is not difficult to find that finance meets all the requirements of the above-mentioned subversive innovation, and logically speaking, it can be implemented completely. It is not difficult to understand why DeFi now accounts for more than half of the public chain field.

China's venture capital is collectively in the air

So in the field of DeFi, how is China's development?

Three years ago, someone asked me a similar question. In the Internet age, China was a laggard, so it was constrained every step of the way. In the blockchain era, China has accumulated a very good talent team, compared with the pace of European and American countries. Is there still that much difference?

At that time, I could still proudly answer them. Although China still lags behind Europe and the United States in the basic technology research of blockchain, it cannot be said to be leading in terms of commercial application implementation, but at least it is neck and neck.

But today, three years later, when we look at the differences between the two worlds, it is obvious that China has been left far behind. According to DeFipulse statistics, among the top ten DeFi protocols, there is not a single Chinese developer team; even in the entire list, there are no more than 3 Chinese developer teams, and they are all at the bottom.

There are very few entrepreneurs, and corresponding investment institutions are also lacking. Good overseas projects cannot be invested in, and the few domestic projects are not favored. There are no projects to invest in, further reduction of investment institutions, corresponding lack of primary market funds, and project entrepreneurship will also be hindered. China's DeFi venture capital circle is walking in such a vicious circle.

What caused this situation?

On the one hand, China's developer community is not mature enough. Existing DeFi protocols are mainly developed based on the Ethereum public chain, and most of the developers of these DeFi protocols were developers of Ethereum before. However, the members of the core community of Ethereum are mainly from Europe and the United States, and the differences in regions and cultures have led to a lack of integration among domestic developers and insufficient support from the Ethereum Foundation.

On the other hand, the landing of DeFi is long and far away from money in the early stage. Whether it can be implemented has always been a question mark before. It was not until this year that the number of users and the amount of funds have achieved substantial growth. And these top protocols have been quietly cultivated for many years. Maker was established in 2015, and Compound was established in 2018.

While the whole world is following the progress of the DeFi field and making great strides, China’s venture capital is moving from collective absence to collective exit. Obviously, the lack and faults in this stage and field are forming.

DeFi is a high ground that will open the door to digital migration

Don't think that this is just as simple as a change in an industry.

The financial industry is the mother of all industries, and changes in the financial industry affect and affect all industries. Whoever controls the financial infrastructure controls the lifeblood of the world economy.

How many countries are more worried about the United States forcibly cutting off the SWIFT system than the United States raising its tariffs. After all, cutting off the SWIFT system is as fatal as cutting off all the blood vessels connecting an organ to the body.

And now, all financial infrastructures are migrating to the DeFi field.

In the long run, what DeFi leverages is not just finance.