The decentralized finance that Soros Fund is interested in will change the world?

Many so-called innovations can easily evolve into a financial bubble in the end. But after the bubble bursts, the real “gold” will also emerge.

As early as March 2000, the famous financial magazine “Babylon” weekly published a cover article called “Burn Out”, which revealed the terrible situation of Internet companies at that time.

Among the 207 Internet companies surveyed, 71% have negative profits, and 51 companies will run out of cash within 12 months. Even the cash flow of the popular Internet idol “Amazon” can only last for 10 months.

At that time, Internet companies that were recognized by countless investors to change the world eventually became “Internet scams.”

After the “Babylon” news was released, the Nasdaq Index fell by 25% in less than a month. On April 14 alone, the Nasdaq Index fell by more than 9%.

In this bubble movement, 52% of Internet companies listed on the US stock market went bankrupt, and the remaining 48% generally fell by 75% in market value. Cisco, which fell by 90%, was once rumored to be delisted from the Nasdaq.

Now 20 years later, the Internet has become the existence of “hydropower, coal” among the basic elements of human society. The advanced Internet technology has updated the way of human life and production, and the various Internet models have pushed business to a peak that has never been seen in the history of human business.

Cisco’s stock price, which was once rumored to be delisted, rose from $6/share to $54/share, and Amazon even rose from $1.3/share to $3246/share, an increase of 2500 times, becoming the world’s largest e-commerce company.

Twenty years after the dot-com bubble burst, cryptocurrencies seem to be evolving into a global bubble. But among them, what breakthrough technologies and results will truly change the world?

DeFi (full name Decentralised Finance, also decentralized finance), may be worth paying attention to.

Can DeFi reshape the financial world?

A few days ago, Dawn Fitzpatrick, CIO of Soros Fund Management Family Office, said, “We (Soros Fund Management Family Office) do have some cryptocurrencies, not many, these cryptocurrencies are not as interesting as DeFi and other use cases.”

The old man Soros has been in the financial market all his life. From shorting the Thai baht to shorting the Hong Kong dollar, the capital market is full of turmoil. He can be called an interesting financial product by his fund manager.

Many people may be confused. What is DeFi that even Soros fund managers are interested in?

DeFi is also decentralized finance.

To understand what decentralized finance is, we must first understand centralized finance, that is, traditional finance.

In the traditional financial industry, the three most familiar and inseparable institutions in our lives are the banking, insurance, and securities industries. These three institutions represent the three major sectors of currency storage and settlement, risk hedging, and asset flow.

In the existing financial system, financial services are mainly controlled and regulated by the central system, whether it is the most basic withdrawal and transfer, loans or derivative financial transactions.

On the other hand, DeFi wants to create a highly transparent financial system that can be accessed by anyone through the distributed system of the blockchain.

Since everyone can access and everyone can supervise, decentralized finance can minimize the risk of trust, and even insiders can’t do evil.

For example, in the infrastructure of cryptocurrency, the Ethereum browser has such a transparent and open mechanism.

In the Ethereum browser, you only need to know the exchange wallet address (account number), everyone can inquire about the exchange’s recent transaction records, and the transfer time, quantity, and transaction fees of each record are clearly visible.

The decentralized finance that Soros Fund is interested in will change the world?

At present, DeFi is not only favored by Soros Fund, it is already very popular in the entire cryptocurrency circle. Let’s first look at a set of data.

In June 2017, the concept of DeFi was just proposed. The lock-up amount of the DeFi fund pool in the entire cryptocurrency market was US$682. This is the data when the DeFi fund pool was created.

The decentralized finance that Soros Fund is interested in will change the world?

As of May 2020, the DeFi fund pool has reached a lock-up amount of US$1 billion. However, we can see from the data graph that even though it is US$682 to US$1 billion, there is still a horizontal line on the data graph. Disc straight.

By August 2020, the DeFi concept broke out. The reason was the impact of the U.S. epidemic currency release, and people in the traditional financial market began to accept the new financial order in cryptocurrency-decentralized finance.

Starting from August 1, 2020, DeFi will start from a $4 billion lock-up volume. When the Biden Big Fund releases water on September 6 this year, DeFi’s highest lock-up volume on the Ethereum chain is $80 billion.

And this is just the data in the Ethereum token. If the data from Binance, Huobi, and OKEx are added, the total lock-up volume is 200.4 billion U.S. dollars.

The decentralized finance that Soros Fund is interested in will change the world?

Judging from the starting volume of DeFi in August 2020, the lock-up volume of the DeFi fund pool has reached a 20-fold increase in one year and one month. If it is calculated from 2017, it has reached 10 million. Times the locked position of the fund pool.

In just 2 years, the DeFi market has grown from a few hundred dollars to 200 billion in funds. The popularity of this market is self-evident.

Why does a seemingly conceptual DeFi attract the attention and favor of Soros Fund and a large amount of funds?

The emergence of DeFi is like setting up a new financial world and a new financial order on the Internet. In this financial order, there is no need to set up a separate financial management. Everyone is financial supervision, and all information is open and transparent.

Any malicious information in DeFi will be fed back to the company’s credit.

And the operation of the DeFi financial system is completely determined by the smart contract code, without manual intervention. (Smart contract is an automated blockchain program running on Ethereum)

For example, in traditional finance, I want to go to Citibank for a loan of 10,000 yuan. We all know that Citibank’s money belongs to depositors. We believe that Citibank will not borrow randomly because the bank has reserves and is supervised by the Federal Reserve. Citibank has only 5,000 yuan in its hands, and it can also lend 10,000 yuan to the e-bank.

However, there are no financial institutions in DeFi. All financial systems rely on smart contract codes. The money deposited by cryptocurrency players in the DeFi fund pool also uses codes to match lending transactions.

Suppose I borrow 5,000 yuan on DeFi, as long as I have enough collateral, the smart contract will lend 5,000 yuan, but suppose I borrow 10,000 yuan from the DeFi fund pool, and the DeFi fund pool is only 5,000 yuan, where can he change 1 Ten thousand yuan?

Even if the DeFi fund pool has 10,000 yuan, and the value of my collateral is not enough, DeFi will not believe that I can repay 10,000 yuan, and the loan transaction will be automatically cancelled.

Then if my collateral is enough 10,000 yuan, the DeFi smart contract also loaned me 9,000 yuan, what if I can’t pay it back?

DeFi smart contracts are the same as real life. The collateral is not returned when it expires, and the assets are directly auctioned and recovered. However, in the real world, the auction and recovery of the collateral are determined by people, and everything in DeFi is determined by a machine written in advance. The rules are determined.

In the DeFi financial system, everyone’s assets are strictly reviewed by the DeFi smart contract, no one can tamper with the data, the data is open and transparent, and the smart contract code is responsible to everyone.

In the DeFi financial order, the problem of borrowing and lending in finance is solved, and most of the problems of finance are also solved. Leverage, trading, and derivatives are all derivatives of lending.

At present, in the Ethereum wallet, in addition to the financial products related to lending, there have been some financial products that subvert the three views of the financial world, and automated market makers are one of them.

Everyone’s market maker’s exchange?

In the stock market, the market maker system has existed for hundreds of years.

In English, the translation of market maker is Market Maker, in other words: where there is no market, market maker creates a market.

The so-called “place without a market” here does not mean that the market does not exist, but that the trading market is not active enough.

In the traditional financial market, only institutions with financial licenses and strong assets can become stock market makers, such as Citigroup, JPMorgan Chase, Morgan Stanley, etc.

Have you ever thought that one day you can become a market maker in the trading market?

In 2017, in cryptocurrency trading, due to the derivation of Ethereum smart contracts, two types of exchanges appeared on the market, namely, centralized exchanges and decentralized exchanges.

The so-called centralized exchanges are exchanges led by domestic Binance, Huobi, and OKEx, and are controlled by various founders. They have control of the exchange account and a veto.

This type of exchange is not much different from the US stocks Nasdaq and Dow Jones. The only difference is that one is for stocks and the other is for currency.

In centralized exchanges, cryptocurrencies generally use order book matching transactions similar to stocks, that is, the exchange matches buyers and sellers to match transactions, that is to say, you can sell bitcoins on the exchange because you buy bitcoins at the same time in the trading market. Coin, he is a zero-sum game.

The decentralized finance that Soros Fund is interested in will change the world?

Decentralized exchanges are different from centralized exchanges. They have no founders and no bosses. All operations in the exchange come from the “volunteer community”, so a large number of orders can only be used in the market maker trading model to increase liquidity.

Since everything on DeFi is handed over to smart contracts, decentralized exchanges are more like a combination of exchanges + market makers. Here you only need to accumulate a pool of funds on smart contracts, and everyone can become a market maker.

For example, the recent popularity of uniswap exchange based on smart contract development is one of the decentralized exchanges.

In uniswap exchanges, unlike traditional centralized exchanges, they do not need to register, they only need to link to their own cryptocurrency wallet authorization to trade.

The uniswap exchange is still in its infancy and its functions are very simple, with only three functions: exchange, sending and fund pooling.

The exchange and sending functions respectively correspond to the trading and transfer functions in centralized exchanges, so I won’t introduce them too much here.

The most interesting function of the uniswap exchange is the fund pool, which is also the market maker system of the exchange. In the interface of the uniswap exchange, we can join in market making as long as we have tokens in our hands.

And it’s not complicated to participate in market making, and we don’t need to do too much, we just need to put the remaining funds in the exchange, and everything is bought and sold by the smart contract.

Suppose we deposit an Ethereum, the official will ask us to deposit an equal proportion of USDT. After depositing these two tokens, liquidity market making will begin.

First of all, the uniswap exchange will give you a liquidity certificate (LP) after you deposit the tokens. This liquidity certificate will receive rewards for participating in market making after the lock-up funds expire, such as fee reductions and fees. Divided.

Secondly, the uniswap exchange will calculate your market-making ratio in the capital pool based on your investment and give you a commission for participating in the market-making.

According to the official introduction of the uniswap exchange, the transaction fee is 0.3% each time, and the recent transaction volume is hovering around 500 million US dollars. The daily fee income of uniswap is about 15 million US dollars.

For users who participate in uniswap market making, the official will give 40% to users who participate in market making, and the remaining 60% will be used for research and development, volunteer community and event operations.

In my discussions with blockchain practitioners, “Junjun” told me, “She is very optimistic about the market maker model of the uniswap exchange. She believes that the uniswap exchange has greatly mobilized through the issue of fund pool rewards and free handling fees. The willingness of traders to participate in the liquidity pool.”

Since anyone can profit from it, people are motivated to provide liquidity for uniswap, and the user experience becomes better as the liquidity increases.

In addition, the operating mechanism of the exchange is completely in accordance with smart contract rules and market operating mechanisms, and labor costs are greatly reduced, and most of the work can be completed only by a team of programmers.

However, “Junjun” also told me that uniswap’s market maker mechanism is not mature, decentralized exchanges are composed of codes, and code vulnerabilities are constantly emerging.

DeFi is not a “panacea”

Any program written based on code will have loopholes. The key is how to fix loopholes and prevent the phenomenon from happening again.

In April of this year, Uniswap broke a smart contract vulnerability that was stolen by hackers of hundreds of thousands of dollars in assets, and then landf platform (dforce is a lending platform on DeFi) lending platform was stolen 25 million US dollars due to the same vulnerability.

The dramatic thing is that the hacker who stole the dforce platform returned $25 million to the dforce platform intact a few days later, but this also awakened all investors in the DeFi pool. (Dforce is a lending platform on DeFi)

According to the slow fog analysis of the blockchain security team, the hacker’s attack method was to use the smart contract to lack re-entry attack protection, causing the attacker to deposit 1 bitcoin in the decentralized exchange, which can get the value doubled. Other tokens. (Equivalent to depositing one bitcoin and withdrawing two bitcoins)

After the theft of dforce, the founder of the decentralized platform compound tweeted that “if a project cannot be professional enough to build its own smart contract, it will directly copy the source code and make slight modifications on the basis of the smart contract. , Then they actually do not have the ability to become a DeFi security review. I hope everyone can learn from the dforce incident.”

The decentralized finance that Soros Fund is interested in will change the world?

The hint from the founder of Compound is very clear. The dforce project party copied our smart contract code, and their project party is not professional.

After the incident, dforce, a decentralized lending that runs on DeFi, the lock-up amount of the fund pool dropped from the highest point of 250 million U.S. dollars to 1.77 million U.S. dollars. It only took less than 6 dollars from the highest point to the lowest point. Months.

The decentralized finance that Soros Fund is interested in will change the world?

In addition to the risk of platform vulnerabilities in DeFi, the risk of private keys has also become prominent recently. (The private key is equivalent to the bank password) Since DeFi does not require any institution to supervise, the possibility of DeFi projects doing evil is also greatly increased.

When some DeFi project parties issue their own decentralized exchange platform coins, they deliberately request authorization on the web page, so that novices who don’t understand cryptocurrency can enter the private key or mnemonic of their blockchain wallet. (The private key is equivalent to the bank card password, and the mnemonic phrase is a combination of bank card account + password)

After obtaining the block chain Xiaobai’s mnemonic words and other information, the project party can change the password and steal the encrypted currency held by the user.

For example, the Weibo user “Lunch in Bingtang Orange” once gave the DeFi project review authority. He wrote on Weibo that “the third day of airdrops, unauthorized authorization was stolen, and re-work” (airdrops refer to cryptocurrency projects). Fang released the “wool” in order to attract users)

The decentralized finance that Soros Fund is interested in will change the world?

In addition, the shortcomings of DeFi include higher transaction fees and higher premiums for asset stablecoins.

However, these two points are not obvious in the hot decentralized exchanges, and can only be regarded as shortcomings, not as security risks.

Write at the end

People are reluctant to change because they are afraid of the unknown. But the only constant fact in history is that everything will change.

I once asked my friends in the cryptocurrency circle why Satoshi Nakamoto must make a decentralized token like Bitcoin?

A friend said, “It stems from Satoshi Nakamoto’s personal disappointment with the existing financial order in the United States.”

Recalling the 2020 epidemic, Biden first released 1.9 trillion yuan in water, and then released 5 trillion yuan in major infrastructure projects.

The dollar index fell from 101 to 89 in half a year. Can such an order of currency abuse not disappoint?

DeFi is an interesting concept that breaks the shackles of non-open and transparent information by financial institutions in traditional finance, and creates an open financial market.

After all, as long as the decentralized financial code is safe enough, the financial assets we hold are safe enough.

Having said that, DeFi is still in its early stages. Will DeFi surpass the traditional financial model and even reshape traditional finance in the future? These are still the mysteries of the future of finance.

Posted by:CoinYuppie,Reprinted with attribution to:
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