secondary title
efficient market hypothesis
College students majoring in finance learn about the Efficient Market Hypothesis theory shortly after starting their professional courses. The theory holds that in a market with transparent information and full competition, all valuable information has been reflected in the price, including the expectation of future value.
The efficient market hypothesis has many controversies in the traditional financial market, because investors often believe that stock prices are manipulated, and market makers can always obtain excess returns. But relatively speaking, in a market with more transparent information, prices are more effective and can better reflect market expectations for the future.
We often think that the top-ranking cryptocurrencies in the encryption market have a wider consensus, more dispersed positions, wider information dissemination, and more effective prices. It should be noted that although most of the information is public information, it is often seldom known before the media reports, so there is a certain room for arbitrage.
From another dimension, we can think that at the end of 2019, most of the market has not realized the fact that BCH will be halved (most people only paid attention to BTC at that time), and after media fermentation in early 2020, the market began to realize After seeing this event, the expectation of supply reduction in the four-year period after halving was fed back to the price, which caused the price to rise.
image description
What we need to discuss is how to obtain excess profits from public information in a relatively efficient market.
secondary title
Impact of Uniswap Mining Suspension
At 8 a.m. Beijing time on November 17, 2020, Uniswap's first phase of liquidity mining stopped. The daily output of UNI has been reduced from 747,944 to 473,972, which is a 30% reduction. Only the team and early investors are left with the daily release amount.
Judging from the situation of the liquidity pool, within two days, nearly half of Uniswap’s liquidity pool was withdrawn. From the changes in ETH’s liquidity, we can draw a conclusion: liquidity mining has played a huge role in Uniswap’s liquidity pool. support. But TVL is not the only factor to judge the value of a DeFi project. All factors will be reflected in the currency price in the end. We need to pay more attention to:
2. Will the reduced UNI output replicate the growth brought about by BTC halving?
Uniswap liquidity pool and trading volume changes
image description
Liquidity changes for ETH trading pairs
From the perspective of trading volume, we can quickly get the answer to the first question: the withdrawal of the ETH liquidity pool did not have much impact on Uniswap's trading volume, and Uniswap's liquidity pool can still meet the daily average of 300 million US dollars. Trading demand - this has far exceeded the trading volume of most second-tier exchanges.
The short-term currency price performance of the review of Uniswap’s suspension of mining has gone through the early stage of the foresight and foresight’s early fund-raising, the media’s release of news, retail investors’ buying, and the three standard stages of cashing out the head. According to the efficient market hypothesis, we conclude that the currency price impact brought about by the cessation of liquidity mining in the short term has already been reflected in the current currency price, and the market impact that may occur in the foreseeable future for a period of time does not need to consider the reduction of UNI production brought about by factors. If there are other events in the market outlook, such as the second rise of DeFi, it is necessary to re-evaluate the impact of other factors on the currency price.
secondary title
Reasonable Valuation and Value Expectation
In the crypto industry, expected returns vary depending on the riskiness of the platform. In relatively cutting-edge fields, such as DeFi’s liquidity mining, investors generally accept a non-destructive annualized return of between 20% and 30%, while in a relatively conservative centralized financial management platform, this return can be reduced to less than 10%. Uniswap's liquidity mining and Binance's Launchpool are two indicators we can refer to.
image description
Of course, the income from liquidity mining is not all the income pledged to the Uniswap liquidity pool. For investors, another income comes from the share of handling fees. Based on the average daily transaction volume of 300 million US dollars and 0.3% handling fee, the daily handling fee share is also close to 1 million US dollars, which is comparable to the mining output income of UNI.
image description
Daily trading volume for ETH trading pairs
One point that needs to be introduced here is the dividend expectation of governance tokens. The bubble of liquidity mining started from COMP, detonated the market through YFI, and reached its peak during the period of SUSHI and UNI. However, the most sought-after project tokens in the market are all governance tokens and have no real revenue sharing. We believe that the rising logic of governance tokens largely comes from people’s expectations of dividends for project tokens. This is why on decentralized platforms and DeFi projects, TVL and total transaction volume/loan volume are positively correlated with the project’s token market value. It is precisely because people believe that by holding governance tokens, it is possible to obtain the platform’s service fee share in the future. According to the efficient market hypothesis, such expectations are discounted into the current price.
Therefore, for a liquidity mining DeFi project, mining output and income expectations are two important factors that determine currency prices. Mining output determines supply, and income expectations determine demand. We have sorted out the daily release volume of top DeFi projects and recent major events that affect supply, and combined with the market value and trading activity of the project itself, we can better evaluate the token reasonably. We found that the daily output of leading DeFi projects, such as SNX and YFI, is negligible compared to the overall market value of circulation. When considering valuation, only the fundamentals of the project can be considered. In contrast to UNI, it is not wise to buy in the secondary market at the initial stage of listing, because the daily release volume will generate huge selling pressure, and after the liquidity mining is over, the good will be cashed out, and the profits will flee. There will be opportunities to buy at the bottom.
secondary title
secondary title
end
end
Many people will have questions, why is this wave the rise of DeFi? Why is it rising at this time? Is DeFi a bubble? We always believe that after years of hard work, the encryption industry has finally reached a time when its value will rise. Compared with the PPT/white paper entrepreneurship era of blockchain + Everything in 2017, the rise of DeFi is essentially people’s real recognition of decentralized products, because the perfection of decentralized lending/exchanges really solves people’s needs. We can see that after many plagiarisms and forks, and the end of liquidity mining, Uniswap still maintains a real daily trading volume of 300 million US dollars. This is a feat brought by the DeFi world, and it is also the real value expression.
