DeFi has always been a hotly discussed track in the industry. After the track became more and more mature, it began to be segmented by the market. In addition to the frequently mentioned lending and DEX, some micro-innovative tools have gradually been enlarged, such as insurance. Agreements, fixed interest rate agreements, etc., the value and risks of these segments have also attracted a lot of attention from the market. NGC Capital has long been an important investment institution in the DeFi field. Its managing director Cai Yan has more observations, experiences and unique thinking about the overall situation and details of the DeFi track. This time the chain catcher took these questions and conducted in-depth discussions with Cai Yan. Exchange and discuss, hope her interpretation will inspire you.
Question: Regarding the nature of DeFi, there is a view that Bitcoin is the real DeFi. At present, these DeFi protocols are all financial experiments. How do you understand this view? And what should a real DeFi product look like?
Cai Yan: In my understanding, the basic logic of this view is that only Bitcoin is the only digital currency out of the circle, which is truly recognized by traditional institutions outside the circle. In contrast, the DeFi protocols currently playing in the circle are indeed only financial experiment.
Regarding what kind of product is a real DeFi, I think Uniswap is a very typical representative, an epoch-making product. First of all, it is a completely open product, and there is no threshold for anyone or project participation. The second is the decentralization of power. There is no way for teams or multi-signature parties to modify existing contracts and parameters. The most important thing is the team, the team is very inclusive, able to listen to various suggestions from the community, and the development capabilities are also very first-class.
In general, a real DeFi product must first have enough security and stability. If there are some functional innovations based on this, it will be very good. Products like Uniswap that have gradually become DeFi infrastructures are more likely to be met.
Question: Fixed interest rate agreements have received a lot of attention before, but after observation, we found that most of the agreements are still similar to the traditional financial CDO (guaranteed debt certificate) gameplay, with a high risk factor. How do you understand the value and risk of this business?
Cai Yan: It is true that some fixed interest rate agreements are similar to CDO play, which binds a bond behind, but not all fixed interest rate agreements are played like this. The main representative of projects like this CDO play is 88mph, and the binding behind it is Lending agreements such as Aave and Compoud make fixed-rate and floating-rate bonds based on this; like APWine, which is also behind Aave, will issue futures income tokens to lock in your income; Notional itself is a lending market, and do it on this basis A fixed interest rate agreement.
Non-CDO gameplay such as Horizon, is more like an interest rate aggregator, behind it is that users need to generate more suitable target returns through auctions; Saffron, BarnBridge, etc. define different return rates through risk grading. Overall, there is a lot of innovation.
The first aspect of value is innovation, and the second is imagination, because in traditional finance, banks do fixed-income securities, or rating agencies give risk ratings. These businesses are very large and lucrative. That corresponds to a lot of imagination for similar businesses in DeFi. In particular, the fixed interest rate agreement does not have many mature products, and various micro-innovation attempts have become very interesting.
The risk level is still specific to different gameplay. For example, behind the fixed interest rate agreements of lending agreements such as Aave and Compoud, if these lending agreements are attacked, the fixed interest rate agreements bound to them will also be damaged.
In the same way, if you do your own lending market, you may need stronger development capabilities. For another example, if the mechanism or parameter design of this project is not perfect, it will also lead to unstable operation of the agreement, and users may be liquidated in large amounts.
In general, the risk lies in the design of a fixed interest rate agreement, which is a very complicated process that requires constant trial and error.
Q: I just mentioned that the fixed interest rate agreement of Aave/Compound has a higher risk. What do you think is the biggest uncertainty and innovation of Aave?
Cai Yan: In fact, Aave has always been regarded as the forefront of the industry. Their iteration speed is very fast. For example, they are the first to try lightning loans, launch a new economic incentive model, launch the industry’s first security module, and try L2 solutions. Wait.
In the main lending business, they are also very cautious. For example, the design of risk parameters such as mortgage rate and liquidation coefficient is relatively conservative compared to other lending agreements, and there will be no need to reduce risk requirements in order to attract more borrowing funds. .
Like many DeFi projects, even if Aave conducts many audits, it is impossible to guarantee that there are no loopholes. Some time ago, when Aave was just on V2, a white hat hacker pointed out a loophole.
The point of innovation may have been flash loans before. A new product feature unique to the industry at that time also brought a lot of income to Aave. Of course, some people criticize that lightning loans can only help hackers maximize their capital efficiency, but the tool itself is not wrong, and there will definitely be more application scenarios for lightning loans in the future.
The second is the design of the security module, which is a bit like a reserve vault of the project itself to ensure the safety of the project. This is also the pioneer of Aave. To be honest, most of the projects have not yet been able to make a healthy or positively operating token model, nor can they be made into the same security module as Aave, which has a threshold.
Question: The mining model is to a certain extent the fundamental support for the wealth effect of DeFi, but the CEO of Aave previously said that the mining mechanism cannot continue to bring momentum. What do you think of this view?
Cai Yan: The “mining mechanism” is unlikely to fail because it is an incentive mechanism or a cold start method for projects. However, the liquidity mining APY will not always be high. For example, the popular mining high APY last November collapsed after a month or two, leading to a sharp correction in the DeFi market.
Projects like Aave, Uniswap, and Synthetix really broke out into the top 15 in market value in January and February this year. I prefer this to be a manifestation of the long-term value of DeFi. Although everyone likes mining with high APY, I personally rarely participate in mining, so I don’t think liquid mining is the fundamental support of DeFi.
Question: Although MakerDao, as a lending agreement, does not have the rapid rise of Aave, the overall development is still very stable. Some time ago, some underlying assets were added from time to time and some expansions were made in asset richness. Do you think this kind of expansion? What potential risks will it bring?
Cai Yan: I think the market may be more demanding on MakerDao. First of all, it is recognized by everyone as the central bank in DeFi, and DAI is the main stable currency of the DeFi system. Therefore, when it promotes some expansion strategies, the market will feel that Maker’s innovation is exhausted and can only be used This method boosts the currency price regardless of the stability of the system. At present, there is no need to worry about these issues. As one of the oldest DeFi protocols, MakerDAO is still very mature.
Q: Yes, you have previously output your views on the insurance agreement in DeFi’s narrative & data article. Based on the recent situation, when will the insurance track come to the breaking point?
Cai Yan: Even in the traditional financial industry, insurance is a very difficult product. First of all, insurance involves more parties. This is especially true in the DeFi industry. In particular, “hacking incidents” have occurred more recently, so it is difficult for every security incident to be affected. Compensation, but also shows that no project can be strong enough to really pay users very effectively.
Then why can traditional insurance do it? First of all, it is integrated into the entire financial framework. For example, traditional large commercial insurance companies continue to reinvest after being insured by a large number of users, and their large insurance policies can also be reinsured. The system is very stable and has a large number of stable and long-term Cash flow to ensure the operation of the business, generally will not go bankrupt due to large compensation;
Secondly, there is state financial support and endorsement behind traditional insurance, but there is no such endorsement in the DeFi industry. Therefore, DeFi insurance can only do some relatively innovative products to protect the part that it can insure. For example, Cover is market-led by user-to-betting; the main idea of Nexus Mutual is mutual insurance, so it can do better. Large pool of funds.
The recent popular insurance project Unslashed is a graded risk insurance. It has a set of algorithms behind it. According to the algorithm, it scores items and grades insurance. It first determines which items are safer and which items are relatively unsafe, and then based on the risk factor. Design insurance policies to maximize the efficiency of the funds deposited by users.
Question: Who will “insure” the insurance agreement?
Cai Yan: There is no way to solve it. The attributive term in front of DeFi insurance is DeFi, which is essentially a DeFi project. As long as it is a DeFi project, there may be potential risks caused by hacking, stolen, and internal team problems. No one can guarantee the insurance agreement. On the whole, the industry is quite disappointed with insurance. For example, Nexus CEO made an incident of his wallet being stolen, and its own mechanism was not conducive to its currency price increase, so it was very embarrassing. Another example is Cover designed a good mechanism, but the team is so bad, causing everyone’s confidence to weaken.
Question: Nowadays, the composability between on-chain protocols is very popular, and it has become a trend. In this context, are there any important issues that have not yet been vigilant in the DeFi market?
Cai Yan: Composability will indeed aggravate the systemic risks of DeFi, but at the same time, composability will definitely make DeFi develop better. The advantages outweigh the disadvantages. Everyone should look in a good direction. The problem that needs to be vigilant is that the market situation is now very good, and some products are likely to adopt too radical development methods. For example, the project Cream, which I dislike, uses many very volatile tokens as collateral assets.
For another example, in the bear market, everyone is very worried about whether Synthetix’s mechanism will cause it to risk a downward spiral, because its smart contract design is very complicated, and the way users generate synthetic assets is only mortgage tokens, so many people at that time were predicting this and that. However, there is a bull market now. At the moment when most DeFi tokens have risen very high, no one talks about these potential concerns. The overheated market has caused everyone to ignore the small loopholes and potential risks in the mechanism.
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March 11, 2021DeFi has always been a hotly discussed track in the industry. After the track became more and more mature, it began to be segmented by the market. In addition to the frequently mentioned lending and DEX, some micro-innovative tools have gradually been enlarged, such as insurance. Agreements, fixed interest rate agreements, etc., the value and risks of these segments have also attracted a lot of attention from the market. NGC Capital has long been an important investment institution in the DeFi field. Its managing director Cai Yan has more observations, experiences and unique thinking about the overall situation and details of the DeFi track. This time the chain catcher took these questions and conducted in-depth discussions with Cai Yan. Exchange and discuss, hope her interpretation will inspire you.
Question: Regarding the nature of DeFi, there is a view that Bitcoin is the real DeFi. At present, these DeFi protocols are all financial experiments. How do you understand this view? And what should a real DeFi product look like?
Cai Yan: In my understanding, the basic logic of this view is that only Bitcoin is the only digital currency out of the circle, which is truly recognized by traditional institutions outside the circle. In contrast, the DeFi protocols currently playing in the circle are indeed only financial experiment.
Regarding what kind of product is a real DeFi, I think Uniswap is a very typical representative, an epoch-making product. First of all, it is a completely open product, and there is no threshold for anyone or project participation. The second is the decentralization of power. There is no way for teams or multi-signature parties to modify existing contracts and parameters. The most important thing is the team, the team is very inclusive, able to listen to various suggestions from the community, and the development capabilities are also very first-class.
In general, a real DeFi product must first have enough security and stability. If there are some functional innovations based on this, it will be very good. Products like Uniswap that have gradually become DeFi infrastructures are more likely to be met.
Question: Fixed interest rate agreements have received a lot of attention before, but after observation, we found that most of the agreements are still similar to the traditional financial CDO (guaranteed debt certificate) gameplay, with a high risk factor. How do you understand the value and risk of this business?
Cai Yan: It is true that some fixed interest rate agreements are similar to CDO play, which binds a bond behind, but not all fixed interest rate agreements are played like this. The main representative of projects like this CDO play is 88mph, and the binding behind it is Lending agreements such as Aave and Compoud make fixed-rate and floating-rate bonds based on this; like APWine, which is also behind Aave, will issue futures income tokens to lock in your income; Notional itself is a lending market, and do it on this basis A fixed interest rate agreement.
Non-CDO gameplay such as Horizon, is more like an interest rate aggregator, behind it is that users need to generate more suitable target returns through auctions; Saffron, BarnBridge, etc. define different return rates through risk grading. Overall, there is a lot of innovation.
The first aspect of value is innovation, and the second is imagination, because in traditional finance, banks do fixed-income securities, or rating agencies give risk ratings. These businesses are very large and lucrative. That corresponds to a lot of imagination for similar businesses in DeFi. In particular, the fixed interest rate agreement does not have many mature products, and various micro-innovation attempts have become very interesting.
The risk level is still specific to different gameplay. For example, behind the fixed interest rate agreements of lending agreements such as Aave and Compoud, if these lending agreements are attacked, the fixed interest rate agreements bound to them will also be damaged.
In the same way, if you do your own lending market, you may need stronger development capabilities. For another example, if the mechanism or parameter design of this project is not perfect, it will also lead to unstable operation of the agreement, and users may be liquidated in large amounts.
In general, the risk lies in the design of a fixed interest rate agreement, which is a very complicated process that requires constant trial and error.
Q: I just mentioned that the fixed interest rate agreement of Aave/Compound has a higher risk. What do you think is the biggest uncertainty and innovation of Aave?
Cai Yan: In fact, Aave has always been regarded as the forefront of the industry. Their iteration speed is very fast. For example, they are the first to try lightning loans, launch a new economic incentive model, launch the industry’s first security module, and try L2 solutions. Wait.
In the main lending business, they are also very cautious. For example, the design of risk parameters such as mortgage rate and liquidation coefficient is relatively conservative compared to other lending agreements, and there will be no need to reduce risk requirements in order to attract more borrowing funds. .
Like many DeFi projects, even if Aave conducts many audits, it is impossible to guarantee that there are no loopholes. Some time ago, when Aave was just on V2, a white hat hacker pointed out a loophole.
The point of innovation may have been flash loans before. A new product feature unique to the industry at that time also brought a lot of income to Aave. Of course, some people criticize that lightning loans can only help hackers maximize their capital efficiency, but the tool itself is not wrong, and there will definitely be more application scenarios for lightning loans in the future.
The second is the design of the security module, which is a bit like a reserve vault of the project itself to ensure the safety of the project. This is also the pioneer of Aave. To be honest, most of the projects have not yet been able to make a healthy or positively operating token model, nor can they be made into the same security module as Aave, which has a threshold.
Question: The mining model is to a certain extent the fundamental support for the wealth effect of DeFi, but the CEO of Aave previously said that the mining mechanism cannot continue to bring momentum. What do you think of this view?
Cai Yan: The “mining mechanism” is unlikely to fail because it is an incentive mechanism or a cold start method for projects. However, the liquidity mining APY will not always be high. For example, the popular mining high APY last November collapsed after a month or two, leading to a sharp correction in the DeFi market.
Projects like Aave, Uniswap, and Synthetix really broke out into the top 15 in market value in January and February this year. I prefer this to be a manifestation of the long-term value of DeFi. Although everyone likes mining with high APY, I personally rarely participate in mining, so I don’t think liquid mining is the fundamental support of DeFi.
Question: Although MakerDao, as a lending agreement, does not have the rapid rise of Aave, the overall development is still very stable. Some time ago, some underlying assets were added from time to time and some expansions were made in asset richness. Do you think this kind of expansion? What potential risks will it bring?
Cai Yan: I think the market may be more demanding on MakerDao. First of all, it is recognized by everyone as the central bank in DeFi, and DAI is the main stable currency of the DeFi system. Therefore, when it promotes some expansion strategies, the market will feel that Maker’s innovation is exhausted and can only be used This method boosts the currency price regardless of the stability of the system. At present, there is no need to worry about these issues. As one of the oldest DeFi protocols, MakerDAO is still very mature.
Q: Yes, you have previously output your views on the insurance agreement in DeFi’s narrative & data article. Based on the recent situation, when will the insurance track come to the breaking point?
Cai Yan: Even in the traditional financial industry, insurance is a very difficult product. First of all, insurance involves more parties. This is especially true in the DeFi industry. In particular, “hacking incidents” have occurred more recently, so it is difficult for every security incident to be affected. Compensation, but also shows that no project can be strong enough to really pay users very effectively.
Then why can traditional insurance do it? First of all, it is integrated into the entire financial framework. For example, traditional large commercial insurance companies continue to reinvest after being insured by a large number of users, and their large insurance policies can also be reinsured. The system is very stable and has a large number of stable and long-term Cash flow to ensure the operation of the business, generally will not go bankrupt due to large compensation;
Secondly, there is state financial support and endorsement behind traditional insurance, but there is no such endorsement in the DeFi industry. Therefore, DeFi insurance can only do some relatively innovative products to protect the part that it can insure. For example, Cover is market-led by user-to-betting; the main idea of Nexus Mutual is mutual insurance, so it can do better. Large pool of funds.
The recent popular insurance project Unslashed is a graded risk insurance. It has a set of algorithms behind it. According to the algorithm, it scores items and grades insurance. It first determines which items are safer and which items are relatively unsafe, and then based on the risk factor. Design insurance policies to maximize the efficiency of the funds deposited by users.
Question: Who will “insure” the insurance agreement?
Cai Yan: There is no way to solve it. The attributive term in front of DeFi insurance is DeFi, which is essentially a DeFi project. As long as it is a DeFi project, there may be potential risks caused by hacking, stolen, and internal team problems. No one can guarantee the insurance agreement. On the whole, the industry is quite disappointed with insurance. For example, Nexus CEO made an incident of his wallet being stolen, and its own mechanism was not conducive to its currency price increase, so it was very embarrassing. Another example is Cover designed a good mechanism, but the team is so bad, causing everyone’s confidence to weaken.
Question: Nowadays, the composability between on-chain protocols is very popular, and it has become a trend. In this context, are there any important issues that have not yet been vigilant in the DeFi market?
Cai Yan: Composability will indeed aggravate the systemic risks of DeFi, but at the same time, composability will definitely make DeFi develop better. The advantages outweigh the disadvantages. Everyone should look in a good direction. The problem that needs to be vigilant is that the market situation is now very good, and some products are likely to adopt too radical development methods. For example, the project Cream, which I dislike, uses many very volatile tokens as collateral assets.
For another example, in the bear market, everyone is very worried about whether Synthetix’s mechanism will cause it to risk a downward spiral, because its smart contract design is very complicated, and the way users generate synthetic assets is only mortgage tokens, so many people at that time were predicting this and that. However, there is a bull market now. At the moment when most DeFi tokens have risen very high, no one talks about these potential concerns. The overheated market has caused everyone to ignore the small loopholes and potential risks in the mechanism.
Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.
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