Overview Overview
This article will give a general overview of the DeFi landscape.
Report report
Report report
The main goal of DeFi is to establish a unified and permissionless banking and currency system, and to develop decentralized, censorship-resistant applications and products on this basis. Decentralized applications built on this system are called DApps. Different from traditional methods, DApp runs in a P2P peer-to-peer transaction network without a central point, rather than on a central server.
DApps are built on three key principles:
open source and interoperability The commitment of software developers and the systems they create to open resource sharing with one another.
Inclusion and Accessibility Enabling anyone in the world to access the financial system and its vital products such as mortgages, insurance, and business loans. With more than 1.7 billion people still unbanked today, an app like this could remove a decades-old barrier and have a huge impact on the world.
Currently, one of the largest segments of the DeFi ecosystem is stablecoins. Among the decentralized stablecoins, Dai occupies the vast majority of the market. We roughly divide these DeFi ecosystems into three categories: issuance, ownership, and transactions.
issued
Issuance here refers to the creation of a new asset (say, debt tokenization) that can be traded, transferred, or used as required. In an ideal world, there should be few barriers to issuance (eg: issuing ERC-20 tokens on Ethereum), and details about their issuance, supply, and transfer should be publicly verifiable. One example is ICO tokens, whose issuance has become a notable trend.
ownership
Ownership here refers to solutions that enable custody of tokenized assets or allow them to grow through loan-based products. Products that allow lending can fall under both the issuance or ownership categories, depending on who the user is. For individuals who take loans, this will be a platform for issuance. For individuals (that is, lenders) who provide non-custodial loans, it will be classified under the ownership category. Because for lenders, the product is a mechanism to increase the number of tokens held rather than through centralized custody, similar to a bank term deposit.
trade
Exchange refers to the infrastructure that supports the exchange of tokenized assets. Niche token instruments, such as derivatives, will be considered for trading rather than issuance, as these assets are unique to the platform.
issued
And tokenization and tokenization of tangible assets (such as REITs) has been an area of focus over the past two quarters. Current trends indicate that demand will come primarily from the creation of tradable virtual assets. The “Crypto Kitties” phenomenon in 2017 sparked a strong interest in the issuance of new virtual assets, which stems from the market’s perception of virtual assets. We will see stablecoins continue to dominate “issuances”. Additionally, with Facebook and Coinbase entering the remittance space, issuing fiat-backed digital assets is likely to be a core area of focus for the industry in the coming quarters. This will greatly facilitate the openness of individuals to virtual assets and provide an alternative business model for existing, ad-driven businesses to explore.
stable currency
stable currency
Constrained by the definition of decentralized finance given above, we believe that algorithmic stablecoins that do not require a centralized banking entity are the only truly “decentralized” tokens. Any requirement for assets, commodities, or fiat currency backing could introduce huge centralization hazards in the process. If a stablecoin issuer (such as USDC) can specify the conditions for conversion to US dollars, it cannot be said to be decentralized. While fiat-backed ERC-20 tokens can be used to create DeFi applications, the centralized nature of the custody of assets backing these currencies makes them highly risky.
With the sudden closure of Basis, Maker's Dai has taken over most of the market. Most decentralized exchanges and DeFi-oriented products on the market are based on Dai. In the future, we will see the emergence of two major stablecoin types. One of them will be generated by the exchange. The main purpose of these tokens will be to provide traders with a stable alternative and hedge against the risk of being cut off from banking services. Digitally native stablecoins will also help cut out middlemen in internet operations businesses that can lose out on banks and foreign exchange rates. We can also see competition among social networks like Facebook creating stable regional tokens to enable the platform shopping experience.
debt market
The competition here is in the rates and liquidity offered. Since the market is still in its early stages, traders and lenders will choose the platform that offers the highest interest. Interest rate settlement can be settled in tokens or USD in stablecoins. Platforms like Compound and Dharma currently offer a nominal fixed rate. This has huge appeal to large token holders looking to increase their token holdings with little risk. The rise of staking platforms has added new complications to the bond market. Traders buy token-denominated debt at low interest rates in the debt market and earn collateral interest for arbitrage. Staking providers like Vest and Staked will offer both custody and interest, competing with the bond market for market share. Over time, market efficiency will lead to a convergence of staking and debt-based returns.
A currency token-based bond market also has the ability to integrate markets with different regional interest rates. For example, Japan's inflation rate is only 0.2%. Given the velocity at which tokens circulate globally, investors are likely to move money from low-inflation markets to token markets and issue loans at higher interest rates than banks. Creating a standard cross-platform token lending rate will also be a future direction for DeFi entrepreneurship.
Securities, Insurance and Non-Fungible Tokens (NFTs)
NFTs are not yet mature. With the development of blockchain-built gaming platforms and the emergence of AR/VR applications, we may see NFTs become a core component of this ecosystem. Currently, most of the value in financial applications is still within the security spectrum. It can also be considered that this part of DeFi has a relatively high degree of centralization because it relies on a central issuing entity. Changes to the governance structure of Security Token Offerings (STOs) will combine the advantages of regional regulatory oversight, on-chain governance, and decentralized ownership. However, this will depend on how quickly regulators act. France, Switzerland and Singapore currently lead in transparency.
ownership
Between India’s 2016 demonetization campaign and Venezuela’s current monetary situation, we can appreciate the importance of private ownership of instantly redeemable stores of value for all. Stablecoins with relatively stable currency values can perfectly solve the problems encountered by the above countries. Digital currencies such as Bitcoin are especially popular in countries facing economic blockades and hyperinflation. Given the number of times exchanges have been hacked, the market may be interested in products that can provide financial services without losing custody. It could include tracking the price of a basket of tokens (like the Set Protocol), making direct peer-to-peer payments without the need for a middleman or independent storage. Broadly, we divide them into wallets, money management, and payment networks.
wallet
wallet
Currently, MetaMask is the web 3.0 wallet of choice. Its ease of browser integration has made it the go-to solution for DeFi users. MyEtherWallet is relatively dominant due to its integration with cold wallets. Newer products like Balance and Trust put a lot of emphasis on user experience as a moat.
Additionally, the advent of in-browser wallets like Opera and Brave browser will bring millions of new users to the ecosystem who have never heard of the token before. These wallets will greatly facilitate the use of NFTs (non-fungible tokens) in consumer applications such as games. It won't be long before we see in-game assets being traded through browser-based wallets.
money management
money management
ICONOMI has consistently led the way in terms of the volume of transactions that attract fund managers to build open-ended, trackable portfolios. However, the project is largely centralized. Currently, their only notable competitor is Rigoblock. The startup is working with Ethfinex where individuals can trade on Ethfinex and showcase public portfolios listed on rigoblock. Set Protocol provides a similar method to create a basket of tokens and allow individuals to purchase them. Social trading may not take off until the next bull cycle hits the market, and individuals need tools like tradingview to share how their portfolios are performing. The next bull cycle will also see “social trading” elements connected to personal wallets for tracking portfolios and identifying identities. Settle.finance is an early example.
There is a small group of startups that put a special emphasis on improving the speed at which payments happen. xDai is a project on the POA Network that offers the stability of Dai with the speed of web 2.0. Despite its high level of centralization, the Matic network is able to achieve instant payments. It's still early days for the emerging payment network to identify a clear winner. Defi's payment network may need a service like Stripe, allowing individuals to pay in traditional ways at one end (eg: credit card) and provide tokens at the other end (eg: Dai). This poses a high level of risk associated with fraud and foreign exchange slippage, but it has the power to boost revenues for digital-first internet companies. As payment networks mature, token-based escrow systems will also create new-age business models that were not possible before.
trade
trade
One factor in trading in the challenge ecosystem that sets it apart from mainstream finance is the current barriers to wash trading in the challenge ecosystem. Fees associated with forwarding trade requests (e.g. gas payouts on IDEX orders) may make order forging and market manipulation relatively more difficult. However, this comes with a big disadvantage, slow order settlement and possibly, thin books. Ethfinex alone has a market size of 95 million tokens, closely followed by OMG Network, which has a paltry 2 million in comparison.
Market liquidity and arbitrage in decentralized ecosystems are still on the rise, and it may be a while before we see market efficiencies in token prices like we see with centralized exchanges. Scalability solutions will play a key role in enabling this transformation. Just as traditional finance went through a period of digitization in the 1980s, we will witness the decentralization of trade channels, tighter markets, reduced trade barriers, and a dramatic increase in the transparency of market operations. The traditional banking industry is going through a process of "transparency", and the protocol has begun to evolve to provide complete banking services by itself. The ideal would be a single platform where one could trade, lend and hold tokens. Market Protocol has made a huge contribution to making this happen.
Decentralized Exchange ( Dex )
A key reason why decentralized exchanges are attracting a growing audience is the element of instant escrow and no withdrawal restrictions. Traders who experienced the MtGox hack, as well as long waits for exchanges to verify their AML/KYC documents, would prefer to trade on a decentralized exchange rather than through a centralized one. They are also favored in areas where trade is tightly controlled. With the advent of stablecoins such as USDC, DAI, and USDT, traders are more willing to credit their capital gains to stable assets and convert them into cash through P2P mechanisms, avoiding reporting to the government.
Another aspect that we will see from Dex is that currency exchange will occur without government involvement. A peer-to-peer mechanism involving cash can be used to convert the currency into Ethereum, and a decentralized exchange can be used to buy stable dollar-pegged tokens. Ethereum’s integration of Dai points to the possibility of this happening. In places like India, where inflation is running as high as 6%-7%, it would be a way to circumvent government restrictions on conversions to dollars. However, Dex liquidity and user experience are still poor at the moment. For now, the leader in solving this challenge remains the centralized exchanges. Both Binance and Bitfinex have their own decentralized offerings. There are also concerns that front-running is taking place on decentralized exchanges.
We're still in the very early stages of seeing that element take off in deals. DyDx and CdxProject are currently in the initial stages of product launch. DyDx allows individual investors to buy margin long and margin short bonds, while CDX allows the creation of credit default swaps, allowing traders to hedge against exchange hacks. Nuo has a functional, non-custodial margin trading platform that uses reserves provided by other users to help individuals trade with leverage. Prediction markets like Augur and Gnosis are currently suffering from user experience and user awareness challenges. While projects like Veil and Guesser try to make these tools easier to use, they still have a long way to go.
Liquidity agreement
Liquidity agreement
risk warning:
risk warning:
Be vigilant against illegal financial activities under the banner of blockchain and new technologies. Standard Consensus resolutely resists the use of blockchain for illegal fundraising, network pyramid schemes, ICO and various variants, and dissemination of bad information.
