Substitution, Bridging, DAO and Value Capture The First Principle of DeFi Investing in the Eyes of Traditional Finance Dogs

From an investment perspective, technology that is divorced from real-world applications will not have room to grow, and DeFi has been one of the core engines of the market’s rise in every bitcoin bull market since 2017.

Substitution, Bridging, DAO and Value Capture The First Principle of DeFi Investing in the Eyes of Traditional Finance Dogs

As a traditional financial dog, especially or a secondary market industry researcher, my research experience in the field of technology emerging industries has made me form the habit of starting to think from first principles. Therefore, to sort out the investment logic from the confusion in the face of the complex technology, mechanism, various new terms and concepts of blockchain, and to participate in this round of DeFi boom, I still have to start from the products of various DeFi projects, the pain points they solve, the needs they meet and the value they create.

The underlying value of Bitcoin

On April 14, 2021, Coinbase was officially listed on the NASDAQ exchange, and its co-founder Fred Ehrsam tweeted a shout-out to Satoshi Nakamoto, expressing his gratitude for his genesis in Bitcoin.

With a slight hint of pilgrimage, I left a similar text on that tweet, “You have provided endless imagination for the future structure of community governance for humanity, thank you, Satoshi Nakamoto.”

Therefore, the core of blockchain technology is its decentralized nature. Through distributed bookkeeping, the centralized institutions that control the governance and absolute voice are removed from all kinds of transactions, and the gradual transformation of this technology on traditional fields is firstly reflected in the transaction level of all kinds of assets, forming the current distributed finance (DeFi).

The significance of DeFi

From an investment perspective, technology that is divorced from real-world applications will not have room to grow, and the reason why DeFi has been one of the core engines of the market’s rise in every bitcoin bull market since 2017 is precisely because of the huge application potential it has shown in the traditional financial sector.

In the case of Ether, the most prosperous public chain in the current application innovation ecosystem, among the smart contracts running on it, Compound, AAVE, and Maker meet the demand for asset lending on the chain; Uniswap, Sushiswap, and Balancer have become decentralized distributed exchanges by virtue of their automated market-making mechanisms, meeting the demand for transactions on the chain The company also allows anyone to earn fees by providing assets to act as market makers; Synthetix, Alpha Homora, and dYdX provide decentralized derivatives trading; Yearn Finance acts as a machine gun pool income aggregator to help asset providers efficiently obtain interest-bearing income from digital assets in their hands; Chainlink is an ethereum Chainlink is a quotation prophecy machine on the Ether, providing quotation services for various transactions as the infrastructure on the chain; mutual insurance agreements such as Nexus Mutual have also emerged in the direction of insurance in the traditional financial sector.

Compared with the inefficiency and high operating cost of traditional centralized financial institutions, decentralized financial smart contracts can maintain efficient operation for a long period of time, 24 hours a day, global transactions, without time and location restrictions, and automatic market making, quotation and trading, which significantly reduces operating costs.

In a more innovative area, the trading of traditional off-chain assets on the chain has become one of the hot spots for DeFi development since the bull market in 2021, with more new projects emerging. For example, Big Data Protocol, which attempts to trade decentralized data sets on the chain, Boson Protocol, which trades real-world business data on the chain, various algorithmic stable coins such as BAC, Ampl, Fei, etc., which focus on establishing a stable value of coins on the chain instead of anchoring dollar assets through an elastic supply adjustment mechanism, mapping assets such as stocks to the chain DeFi is becoming more and more integrated with the real world, and these constant innovations promote off-chain asset trading and will drive DeFi’s continued value capture of off-chain assets. capture.

Like 2020, 2021 is also a year in which magical reality continues to happen all around us. From the U.S. President being blocked by the Internet giants in a concerted effort to block statements, to U.S. retail investors uniting to hang Wall Street shorting institutions, to centralized stock exchanges targeting to restrict retail trading causing massive retail losses, the evil of centralized institutions has become more and more reckless, which makes DeFi’s existence even more equipped with its unique value. In the on-chain world, algorithms are laws, smart contracts are open and transparent, on-chain data is open and transparent, and it is more difficult for centralized institutions to manipulate the market, and by issuing project passwords and governance tokens, various projects have realized the form of community governance – DAO (Decentralized Autonomous Organization). Autonomous Organization), which has become a new form of organizational governance after the corporate system.

In DAO, anyone can participate in the growth and operation of the project by holding the project governance tokens and share the benefits of the project growth. In addition, many projects ensure a certain degree of decentralization of project governance through a fair governance token distribution mechanism, and the natural full circulation of governance tokens ensures fairness of project revenue distribution and governance compared to the traditional joint stock system.

It is these characteristics of DeFi, and its efficient, low-cost, and convenient on-chain transactions that have led to the rapid growth of the DeFi ecosystem, with the total DeFi lock-up exceeding $100 billion in April 2021, surpassing Silicon Valley Bank, the 40th largest bank in the U.S. with $97 billion in assets, and in May 2020 With the number of active addresses in the DeFi space reaching 1 million by the end of 2020, a tenfold increase from the beginning of the year, the time for change has come.

The new investment opportunities embedded in DeFi

Due to the rapid development of DeFi, the first public chain Ether has experienced high Gas cost, transaction congestion and other problems. In order to undertake the liquidity overflowing from Ether, CeDeFi public chain was born, BSC and Heco have also been developing like a fire since their launch, while the improvement of Ether’s own Layer2, partitioning and ETH2.0 are also being gradually promoted. But it must be said that the CeDeFi public chain provides a good platform for newcomers to the DeFi field to get familiar with DeFi operations, and at the expense of a certain decentralized exchange public chain, it seems to have certain security advantages.

At the same time, CeDeFi public chains are growing rapidly in terms of users and transactions due to their low Gas, fast transaction verification and various types of support for developers.

Meanwhile, if we consider CeDeFi and other public chains such as EOS, Wavefield, Terra, Solana, etc. as side chains of Ether, then naturally the demand for cross-chain asset trading will be born. Maybe there was a debate a year ago about whether cross-chain demand is a pseudo-demand or not, but with all kinds of public chains blossoming today, the future has gradually become clear. If Polkadot, which was launched this year and has conducted four rounds of parallel chain slot auctions so far, can truly link various “silo” public chains, the explosion of Polka ecology may also be worth looking forward to.

Of course, the development and improvement of the first public chain Ether is also a topic that needs to be focused on. The overflowing value of Ether is not only the basis for the development of other public chains, but also the underlying logic for the parallel development of multiple chains. Ethernet’s current high Gas cost and congestion have promoted a variety of solutions, including the EIP-1559 proposal in the London fork to be deployed on July 14, which will significantly reduce the Gas cost, and the expansion of Ethernet Layer2 Layer 2 network will significantly increase the number of transactions to 2000-4000 transactions/second based on the current 15 transactions/second. Optimistic rollups and Zk rollups are also expected to be applied gradually in the future, while the more distant ETH2.0 will significantly improve the scalability of Ether, which is a stripped-down upgrade for the Ether network. In this process, Optimism, Matic, Loopring, Skale and other projects emerged to solve the upgrading needs of Ethernet layered network and slice expansion naturally also have the investment value of the stage.

Blockchain technology is a major technological change that can be compared to the Internet technology revolution. In this emerging technology field, the key to making investment judgments is to keep an open mind because the future of technological change has infinite uncertainty, which requires us to be inclusive enough to judge various investment projects, after all, even V God himself may not be able to imagine the DeFi ecology in the big explosion in 2020. In the process of blockchain technology’s transformation of the traditional real world, and in DeFi’s ongoing value capture of the traditional financial sector, all we have to do is to find the most critical pain point cut to solve the application of the technology and become the promoter and participant of this wave of change.

The author is a buy-side researcher in the technology sector of the traditional finance industry.

Posted by:CoinYuppie,Reprinted with attribution to:
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