Blockchain and finance have a natural fit factor. Bitcoin originated in the global financial crisis, blockchain landed on a large scale in the DeFi field, and NFT opened the door to the capitalization of everything. All the stories in traditional finance repeat themselves in the field of encryption.
1. The logic of financial development is repeated
The core of finance is the conversion of utility and risk in different time and space. Financial institutions, markets, products, and services all serve this. Everything in the past is a prologue, and the encrypted market reappears one by one.
Traditional financial roles all appear on the encrypted stage
The crypto market provides products and services such as price discovery, settlement, lending, trading, asset management, wealth management, insurance, and derivatives through different smart contracts.
Loans include AAVE, MakerDao, Compound, etc.; trade all Binance, Coinbase, Uniswap, etc.; derivative transactions include Synthetix and similar products; asset management platforms include WBTC, dForce, DeFi Saver, and Zapper, etc.; income aggregators include yearn.finance , DFI.money, etc.; Robo-advisor services include Rari Capital, DAOventures, etc.; leveraged trading platform dydx, etc.; insurance includes Nexus and Opyn, etc.; decentralized fund Cook Protocol, etc. Various financial instruments appear one by one in the blockchain world.
Financial-related services are also being mapped in the crypto world. Credit and risk ratings are an important part of the pricing of financial assets. Saffron Finance and BarnBridge are risk grading agreements in the DeFi field. Smart contract audit institutions such as SlowMist and Certik have replaced traditional financial audits on target financial conditions with code audits. , Paving the way for the large-scale application of DeFi.
The operating principles of encryption and traditional finance are the same, but innovation is not the same
Security, liquidity, and profitability are the three principles of traditional financial industry operations, and the innovation and iteration of DeFi and NFT projects are basically carried out around these three directions.
Liquidity mining promotes the rapid expansion of DeFi. On the one hand, liquidity mining attracts liquidity to enter the project, and on the other hand, the native token issued by itself has created new liquidity for the market, greatly enriching the encrypted asset market and improving the project at the same time Profitability.
DeFi’s smart contracts form financial Lego through different combinations, and carry out financial product innovation at multiple or even exponential levels to attract a large amount of liquidity. The most important indicator to measure the scale of use of a DeFi project, the total locked-up volume (GVL), is the sum of the total value of all ETH and various ERC-20 tokens locked in the smart contract of the project. At the beginning of 2020, all chain GVL was only 400 million US dollars, at the end of 2020 it was 17.3 billion US dollars, and it exceeded 100 billion US dollars on April 27, 2021.
In traditional finance, the issuance of non-standard products, including asset securitization, has promoted the circulation of the ownership, possession and income rights of physical assets. In the encryption field, NFT (Non-Fungible Token) has similar functions and more scope. wide. The target of DeFi is Bitcoin, Ethereum, or homogenized tokens issued by various projects, while NFT usually refers to the tokens issued by developers on the Ethereum platform according to the ERC721 or ERC1155 standard/protocol, which is an indivisible token. , Irreplaceable and unique Token, NFT can digitize almost all assets, realize transactions and transfers, and increase their liquidity.
In terms of security, DeFi projects use over-guarantees and mortgages to avoid the risk of insufficient credit, use smart contract security audits to avoid the risk of project attacks, and use insurance projects such as NXM and Nsure to provide risk protection for risk events that DeFi projects may encounter.
The rise of the crypto market also requires a complete infrastructure
A mature financial market requires a complete infrastructure, including a complete market system, settlement system, pricing system centered on benchmark interest rates, industry standards, hardware facilities, financial services, etc. The encryption market also has a one-to-one correspondence.
Protocol, DAPP, DAO, and Hodler form the market system; the underlying public chains such as Ethereum become the global value settlement layer; the price system formed with Bitcoin as the core asset and stablecoin as the anchor for pricing; Ethereum ERC-20 is DeFi The main standards of tokens, ERC721 and ERC1155 are the main standards of NFT, which together build a standard system for the encrypted asset market; various types of wallets with powerful functions and user-friendly interfaces become users’ buying, selling, lending, and lending like convenient bank branches or ATM machines in reality The entrance; Polkadot, Cosmos, Layer2, etc. are forming the basic tools for cross-chain asset transfer and improving transaction efficiency. A complete encrypted financial system has been formed and optimized day by day.
2. Old stories, new methods
Encrypted finance is not just a repeater of real finance. With old stories and new teachings, encrypted finance is full of vitality. What are the significant advantages of encryption over traditional finance?
Decentralization
DeFi can help individuals with asset management needs to enjoy various financial services without trusting any intermediary; rely on the characteristics of the blockchain to create trust, and transform the trust in the government and bank and other credit institutions in traditional transactions into code and The trust of smart contracts; without the intervention of a third party, all services are completely free of permission, all transactions cannot be tampered with, and the unity of privacy and transparency can be achieved.
Fully open ecology, extremely fast innovation
One day in the currency circle, one year in the world. One day for DeFi, one year for the currency circle. The innovation of traditional finance requires multiple links of initiation, testing, trial and error, and adjustment. All agreements are open source. Anyone can cooperate on the agreement to build new financial products and accelerate financial innovation under the network effect. Motivation can come from the discovery of problems by project developers, or from the proposals of countless community members, initiating innovations to achieve a flat project iteration process, avoiding a lot of traditional financial time and energy from being consumed in redundant processes.
Take Uniswap as an example. In November 2018, Uniswap was publicly released and deployed to the Ethereum mainnet as its V0 version, and the V1 version was released in November 2018. In May 2020, the V2 version was launched on the Ethereum mainnet. V3 will soon be ushered in in 2021. The evolutionary history of financial development for hundreds of years has been repeatedly condensed in the field of encryption to just a few years or even a few months.
Low asset barriers, strong liquidity, and extremely high circulation efficiency
There are strict firewalls between different types of assets such as traditional financial equity and debt, and the encryption market is different. Stable coins can be priced at any encrypted asset and can circulate arbitrarily across the entire network. Anchored coins such as WBTC realize the cross-chain liquidity of Bitcoin, and truly introduce Bitcoin, the core encrypted asset, into the DeFi ecosystem and become the anchor of the value of the DeFi ecosystem. NFT can confirm the rights of any asset and transfer the ownership.
There is a clear distinction between the fund pools of different financial institutions in traditional finance, and every money belongs to a relatively closed pool. DeFi removes this barrier, the world’s money can be in one pool, and users can choose any combination of different DeFi products and financial protocols.
Traditional financial cross-border capital flows have many links, which takes a long time and the cost remains high. Under the public ledger of the blockchain, as long as there is a wallet address, as long as the entire network is confirmed, the funds can instantly arrive in the wallet anywhere, and the cost of payment is only the gas fee for the entire network confirmation.
Most encrypted assets are the unity of financial targets and governance rights
In traditional finance, equity and debt products represent different rights and responsibilities. Tokens in DeFi and NFT are mostly governance tokens issued by various protocols and platforms. These Tokens are not only the subject of financial activities such as lending and wealth management, but the holders can also participate in the governance of the project by virtue of the tokens, and possess the attributes of debt and equity financial products.
Third, the interaction of parallel worlds
The initial form of financial activities in the crypto field is a parallel world of real finance. Providing services and products such as settlement, lending, trading, asset management, wealth management, derivatives, insurance, etc., for price discovery and information exchange, there are risks and benefits. The initial DeF i satisfies activities such as lending, financial management, and asset management in the crypto-asset circle. They face the reality of finance across the sea, and each are closed in their own circles and are not related to each other.
However, this is not the whole story. Expansion is the nature of capital, docking and exiting the circle have already appeared, and will dominate the next melody.
One of the driving forces for the docking is from the outside to the inside, and comes from the desire of traditional finance to enter the crypto market. In the context of global liquidity, there is a strong demand for anti-inflation, and large international financial institutions and companies have turned their attention to encrypted assets, which has also created this round of “institutional bulls” in the encrypted market. Grayscale, MicroStratedy, Square, Tesla and other institutions have purchased a large number of encrypted assets such as Bitcoin. The European Investment Bank has also recently issued 100 million euros of bonds on Ethereum, connecting traditional financial products with encrypted assets, and traditional financial tools entering encryption Market and bring in a lot of money.
The second driving force for the docking is from the inside out. The crypto market itself is eager and urgently in need of breaking through the limits of the circle. It no longer relies solely on the original assets of the blockchain like BTC and ETH, and has begun to introduce physical assets such as gold, real estate, and national debt. Connect with the reality of these billions of dollars in assets, and seek to expand its own scale.
The synthetic asset platform is a bridge between DeFi and traditional markets, and accelerates the integration of DeFi and traditional financial markets. Synthetix is the leading project on this track. Synthetix is built on Ethereum. By simulating the prices of stock indexes, gold and other assets, users can directly trade these virtual assets on the blockchain. At present, Synthetix only replicates the price of the anchor, and it is not yet able to convert synthetic assets to real objects one-to-one.
There are also tools for docking Twitter and Facebook social media such as Mask Network, which can introduce social media users into the encrypted market with one click. There are also projects such as Teller Finance that introduces traditional credit data into the DeFi ecosystem. The tentacles of the crypto market have begun to enter all aspects of the traditional financial market.
Another heavyweight player in the crypto market is NFT. In the first quarter of 2021, NFT exploded, and the market turnover exceeded 2 billion US dollars, an increase of more than 131 times over the same period last year. NFT is the first to integrate with the art market, collectibles and games. NFT artist Beeple’s NFT work “Everydays: The First 5000 Days” was sold at Christie’s auction house for $69 million; as an NFT collection of NBA star cards, a LeBron James star card The price is as high as $100,000.
NFT is still exploring the combination of DeFi to create new types of products, such as NFT+ liquidity mining, NFT+ lending, NFT+ index funds, etc., which have introduced huge amounts of external assets to DeFi and improved asset liquidity and profitability.
4. The road to the future, the sea of stars
The ship of encrypted assets has just started.
As of May 2, 2021, the overall market value of the crypto asset market is $2.2 trillion. According to the estimates of the Star Alliance, 17% of the total population of the United States are involved in crypto asset investment, and the figure in the United Kingdom is about 5%. From a global perspective, the penetration rate of crypto assets among Internet users is 1.9%. The penetration rate is 1.2%. According to the “innovation diffusion curve”, the crypto market is still in the very early stage of innovators on a global scale. The road ahead is bright.
The driving force of the voyage is not only the strong desire for self-evolution, but also the accumulation of consensus.
The problems that exist in the crypto market can always be solved in rapid iterative innovation, and then problems will be solved again. Ethereum gas fee is too high? Layer2’s multiple protocols, and other public chain alternatives are rapidly emerging. Does over-collateralization affect liquidity? Several projects of benchmarking credit loans have also begun to test the waters. Insufficient scalability of public chain? A variety of consensus algorithms are continuously improving the TPS of the network. And so on, there are various innovations, and the entire network has a strong desire for self-evolution.
The consensus that Bitcoin can hedge against inflation has become stronger. Bitcoin has not only become an important target for institutional investors in global asset allocation, but also a tool for ordinary people to prevent asset shrinkage, and it is also one of the international reserve currencies of some countries. As of the end of the first quarter of 2021, Bitcoin has a market value of US$1.112 trillion, while the traditional inflation hedge asset gold has a market value of US$10.979 trillion. There is still a lot of room.
At the same time, the post-00 generation digital natives have a high degree of recognition of digital assets. With their growth and increased demand for encrypted assets, the future of the encrypted market is a sea of stars.
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.