“DeFi Great Depression” is a false proposition The market structure innovation has just begun

As NFTs, DAOs, and play earning games become more and more popular, the DeFi market has indeed been somewhat overshadowed recently.

The data will not lie, the market value of DeFi tokens has plummeted by 75% from the high point in May 2021, and even some long-term supporters of the DeFi industry have to admit that the market performance is significantly different from last year. Throughout 2021, we seem to see very little DeFi innovation, and the mainstream market is still flooded with products released in the past two years, such as UniSwap (November 2018), Synthetix (January 2019), MakerDAO Multi-Collateral DAI (2019) November 2020), Curve (January 2020), COMP Liquidity Mining (June 2020), and YFI Governance Distribution (July 2020).

On the other hand, in the context of multi-chain expansion, we have also seen the continuous growth of the entire DeFi industry user base and overall market size. The DeFi 2.0 wave has promoted a number of promising projects, and many options DeFi protocols are also Try to find market competitiveness. Frankly, it seems premature to call 2021 a “failure year” for the DeFi industry, and when the market is in a trough, it may be a good time to start a rebound.

Reflecting on DeFi 2021

Perhaps because of the new crown virus epidemic, people’s concept of time has been more or less distorted. In our minds, the past two years sometimes seem compressed together. And for cryptocurrencies, 2021 is like a spring night, you have a great time, but you can’t remember what happened in the morning.

Admittedly, there has been a lot of hype in the market over the past year, but the problem is that it is largely due to increased interest in DeFi rather than innovation. For example, dYdX was born during the first wave of DeFi, but it has not attracted attention until recently; in addition, after winning the “veCRV war” between Yearn and Stake DAO, Convex has only recently emerged (the protocol’s lock-up volume once exceeded more than $21 billion); and Tokemak, it can be said that this liquidity management protocol has made another upgrade iteration on the development of DeFi liquidity. It has not received much attention before, and now many people think that Tokemak will be the next liquidity Compete for the Holy Land (perhaps we are in the golden age of the Ponzi economy).

"DeFi Great Depression" is a false proposition, and market structure innovation has just begun

Above: “Class of 2021” DeFi protocols

Then, let’s talk about the algorithmic stablecoin project Olympus DAO (OHM). Among the “Class of 2021” DeFi protocols such as Tribe, Reflexer and Frax, OHM has the largest decline (Note: Frax was launched in December 2020, we will temporarily Class of 2021), these protocols all use algorithmic protocols to control value, much like Maker can manage and earn from the collateral backing Dai. There is also Alchemix worthy of attention. As a classic DeFi 2.0 protocol, Alchemix relies on other underlying protocols (Yearn), but its biggest feature is that it does not require users to repay, but will directly use the income earned by mortgage tokens to pay off the debt.

Next, let’s look at options and derivatives such as Ribbon and Dopex. As a high-threshold financial derivatives category, options still have many smart contract risks and unknowable risks, but some people tout them as the “next logical development stage” in the DeFi journey. In fact, although a lot of money has been invested in DeFi native options and derivatives protocols, at least so far, no major breakthroughs have been seen, and no products that truly fit the market have emerged.

DeFi: The Liquidity Revolution

Virtually everyone can be a liquidity provider.

In the traditional world, you would buy and hold assets in the hope that those assets would appreciate in value, maybe you would use dollars to buy some seemingly high-return wealth management products in the bank, but in most cases these assets did not “give” You bring the desired benefits”.

In DeFi, the situation is completely different. Holding assets is only the first step, and any investor can become a liquidity provider by depositing these assets in a smart contract, where they can earn additional returns and “get what they want.” Recently, the DeFi market has been paying more and more attention to capital efficiency and the complexity of financial products, but what really matters is how to customize products according to the mindset of HODLers. In this regard, Uniswap V3 is the best example. Since it provides the best capital efficiency for HODLers, Uniswap V3 has become the DEX with the largest average daily trading volume. However, Uniswap V3 also has some problems. For example, the liquidity on the platform is increasingly dominated by professional market makers, so there is almost no “passive liquidity”, that is, the flow brought by non-professionals (or retail investors) sex. Of course, although Uniswap V3 seems to be only a DEX that is “utilized” by professional market makers, if products more suitable for passive liquidity providers can be built on the platform, these problems will be solved.

To be clear, not all DeFi protocols are free from passive liquidity issues. Curve, Convex and Tokemak can be said to be a continuation of passive liquidity preferences, but currently only at the protocol level. At the same time, options protocols also promise to unlock the benefits of individual token exposure – a great proposition for passive liquidity providers, but these protocols haven’t really caught on – probably due to the high market complexity , and at the same time it is difficult to match counterparties.

market structure innovation

How to create passive liquidity opportunities for DeFi users? At this point, trading “old guns” is particularly important. Between 2018 and 2020, newly created liquidation and arbitrage bots allowed ordinary DeFi users to earn on Compound or Uniswap, helping ordinary DeFi as these bots could gain a large advantage in Priority Gas Auction (PGA) Users complete arbitrage and liquidation transactions.

We now have MEV (Miner Extractable Value), which is the total value extracted by reordering, interspersing, or censoring transactions during block generation. At present, the extractable value of MEV on Ethereum is mainly carried out by DeFi traders and arbitrage robots through transaction sorting related trading strategies, and a small part of the value in MEV transactions is obtained by miners in the form of gas fees.

The rapid development of Wall Street over the past 30 years has been entirely due to the continuous advancement of electronic trading. Today, we see Robinhood and Roboadvisors, which are retail-oriented trading products and services, which were electronically traded stocks in the 1970s. innovative products. At the height of the electronic trading revolution, Wall Street gave birth to a group of high-frequency trading firms whose employees saw themselves more as programmers than financiers. Now, all major high-frequency trading firms are turning to DeFi as the next growth market . The last traditional hedge fund to enter is Citadel, which has announced that it is preparing to enter the digital asset market this year, and its CEO Ken Ken Griffin, once one of the biggest crypto skeptics, is now finally acknowledging the value of cryptocurrencies and saying he was wrong to have been in the “camp of naysayers” when it comes to digital assets, reports Sequoia Capital and Paradigm have invested $1.2 billion in Citadel.

So, whether it’s “crypto natives” like Flashbots, or high-frequency trading firms like Jump or HRT, we’re already starting to see a shift in the structure of the crypto market, albeit one that hasn’t yet determined how capital efficiency gains will be Pass on to passive liquidity users, but time will tell. If we look at the history of the electronic trading revolution, it took decades for e-Trade to achieve something, and the phenomenon of using social media to facilitate market transactions like WSB has only recently emerged.

DeFi remains hopeful

Regardless of the industry, when building a new market structure, the process is very similar – you need to invest a lot of capital and energy to develop products and services that ultimately attract a wider range of ordinary users. Take smart contracts, for example, smart contracts have been around for a few years, and while everyone knew that smart contracts would change the way we communicate and coordinate, only recently some people didn’t know how to deal with it. In the BUIDLing stage, we need to build a better infrastructure, for example, you can try to use developer tools such as Infura and Hardhat, or dig into some innovative ideas that may be applicable to blockchain technology – of course, maybe you are in a certain I spent a lot of time on these ideas, but in the end it didn’t work.

We should not be pessimists, so we should look at the “DeFi Great Depression” with a positive attitude:

Even with token prices plummeting, the DeFi system is already very well done. Yes, some DeFi protocols do have loopholes, but the current base-layer protocols are doing very well, and more importantly, today’s blockchain-based financial systems have been widely accepted by TradFi.

Consolidation is a natural industry process, although it has yet to come. You might say that there are all kinds of DEXs and blockchains in the market, but for a new and changing industry, this phenomenon is actually quite normal. Typically, we see a transition like this:

Explosive growth in startups – dust settles – market consolidation

For the DeFi industry, it is also necessary to go through the above process. Of course, there are still many bubbles to be squeezed out.

Multi-chain could start another wave of DeFi innovation. At present, cross-chain bridges have become necessary multi-chain infrastructure, so it may form a new market structure, or directly derive capital efficiency gains from DeFi network expansion, the success of Cosmos is the best proof.


For the crypto market in the first quarter of 2022, you may have noticed a phenomenon – many companies in this space have successfully raised large sums of money. Therefore, this year’s crypto market is likely to see two inflection points that will spur DeFi growth:

1. Ethereum upgrade “The Merge”: It is expected that in June this year, Ethereum 2.0 will be integrated with the original chain and turn to the proof-of-stake consensus mechanism, which will open a new carrier for DeFi products, because when people know that ETH is pledged After the high returns will be obtained, “peripheral services” will also appear, as the success of the Lido stETH token proves.

2. The regulation of the US market is becoming more and more clear. More recently, Biden signed an executive order on cryptocurrencies, bringing clarity to regulation across the industry, thus driving more on-chain assets and a larger DeFi market.

There is no doubt that after the first wave of DeFi has passed, we have entered a period of calm. In the next few years, DeFi protocols may still not see a “qualitative leap”, but the long-term expansion of the DeFi market is certain. So, looking a little further, we want to build a new market structure for the wider financial world—one that is more global, more transparent, and more digitally native.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/defi-great-depression-is-a-false-proposition-the-market-structure-innovation-has-just-begun/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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