Written by: Jubi Labs FANFAN
In fact, this question can be asked in another way. Is the popularity of DeFi accidental and inevitable, or inevitable and accidental?
Don’t rush to answer, we will use three questions to explain today:
1. How DeFi became popular
2. How long can DeFi continue to be popular?
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How did DeFi become popular?
Fire, of course, is first and foremost a demand. Decentralized Finance is still Finance in essence. Finance, Baidu Encyclopedia has a definition, finance is an economic activity in which market entities use [tools] to transfer funds [from the surplus side to the scarcity side]. There is only one innovation in DeFi. We used centralized tools before, but now we use decentralized tools. Today we will not discuss tools, because the fire of DeFi does not lie in De at all, but in Fi.
So the question is, how do funds flow from the surplus side to the scarcity side? One is issuance, and the other is lending. To a certain extent, investment can also be understood as a kind of lending behavior, transferring funds and getting returns. We will not discuss the issue of distribution today. This is another story. We will only talk about lending.
Those who have a surplus of funds in their hands must lend funds to scarce parties to obtain interest returns. This seems reasonable, and this is also the basis for the continued success of DeFi, so Lending projects are the simplest and most primitive type of DeFi. (The essence of DEX is also that the surplus side of funds flows to the scarce side. Here we roughly understand it as a high-level version of Lending, and no special classification is made; similarly, in order to save trouble, the Maker in DEX is also rudely classified as a part of Lender. kind)
Lenders are constantly looking to earn higher returns and Borrowers are constantly looking to pay lower costs. How big is this gap?According to data from DeFi Pulse, the outstanding debt of several mainstream currencies is 1.406 billion US dollars.
The IPY (annualized income) is 44.537 million US dollars, and the annualized interest rate is about 3.167%, which is a relatively normal range.
However, the real loan interest rate is shown in the figure below. Under normal circumstances, the loan interest rate is still in a relatively normal range. However, as the demand for financial intermediation becomes stronger and the information is still asymmetric, the interest rate becomes very unstable and even high. But they have to borrow. For example, miners need to pledge BTC to pay electricity bills.All this is due to Lender's constant desire to increase borrowing returns, and Borrower's constant desire to reduce borrowing costs. How to bridge this gap? The practice of some DeFi projects is very interesting-it issues a new token, and infinitely magnifies the value of this new token, so that the value of the token = the value of the gap.
What exactly is the new token value support? At present, most DeFi define it as an equity currency, or a governance currency. For example, the role of YFI: 1. Add a new lender; 2. Abolish the current lender; 3. Increase deposit and withdrawal fees; 4. Change the on-chain weight of the lender percentage; Funds; 6. If distribution rewards are enabled, YFI will also allow holders to claim their share from the reward pool.
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How long can DeFi remain popular?
That depends on the value of the rights and interests, and requires players to think independently. Whenever the value of this equity is magnified, Lender will fall into a behavior: when the value of the equity is high enough, he is willing to take out the surplus funds.
Just how enthusiastic is Lender? This amount of growth is very, very scary. Taking TVL alone as an example, the current total TVL of mainstream coins is 7.78 billion US dollars, which was only 1 billion US dollars more than three months ago.
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What other concepts can DeFi bring to life?
I think that all things that are beneficial to Lender → Borrower, all economic activities that are conducive to the realization of funds [flowing from surplus funds to scarce funds], all have the gene of fire, and there is a long-term super large and rigid market demand-this is also true. Answering today's question, DeFi will be the largest, most rigid, and most eternal demand scenario in the blockchain world.
Around financial behavior itself, such as issuance, lending, transaction matching, and transaction aggregation; around financial derivatives, such as options, futures, insurance, wealth management, bonds; around blockchain technology that improves financial efficiency and market capacity, such as oracle machines , Layer2, sharding, cross-chain, storage, financial-oriented smart contracts; and explorations around sustainable development, such as governance (DAO). All these make us open our imagination and think that DeFi is full of infinite possibilities.
But you have to understand the problems that these concepts solve in improving the efficiency of capital flow, and it is easy to find which direction will become popular. Of course, don't forget that financial security is the first element.
