Web3 compulsory course: Re-understanding DeFi under the Web3 framework

The DeFi boom has become a thing of the past, but in terms of data, the scale of this market is still unsurpassed by market players such as NFTs. DeFi, which is different from the traditional financial model, can be called DeFi if it involves the use of decentralized means for financial activities, including the huge encrypted token market. As one of the most popular applications for building the Web3 financial market, it will exist forever.

What is DeFi

Many people have participated in DeFi and jointly created the summer of DeFi in 2020. At its peak, DeFi’s liquidity data peaked at the $100 billion mark. This upward trend continued from September 2020 to the second half of 2021, and was followed by a downtrend in DeFi, influenced by overall market sentiment.

Web3 compulsory course: Re-understanding DeFi under the Web3 framework

(Image: Source DeFi Pulse)

During the chasing market dividends, the discussion of DeFi focused more on the projects that sprung up like mushrooms after the rain, which were aggressive and barbaric. Today, the market is calm and calm, but it is a good time to re-learn DeFi. DeFi (Decentralize Finance) is called decentralized finance in Chinese. Compared with CeFi, it operates in a completely decentralized form, with interoperability, composability, programmability and barrier-free inclusiveness. People of all sizes can participate in financial activities in a peer-to-peer DeFi way.

The old Bitcoin is actually a decentralized form of cryptocurrency, completely different from the fiat currency model that relies on centralized organizations such as institutions or banks. Through the proof-of-work consensus mechanism, anyone can become a miner and earn project incentives to jointly protect the security of the network, and Bitcoin is only the most initial form of DeFi. Regarding the initial interpretation of DeFi, Brendan Forster, the co-founder of a lending product, mentioned in “Announcing DeFi, A Community for Decentralized Finance Platforms” published in 2018 that DeFi needs to meet four requirements: be built on a decentralized blockchain On, for the financial industry, the code is open source and has a sound developer platform. This point of view depicts the initial appearance of DeFi.

The real popularity of DeFi comes from the birth of the concept of liquidity mining. The straightforward understanding of liquidity mining is that customers can earn real money by providing financial liquidity. Simply put, as a user, we can hold a token and interact through a certain protocol, that is, engage in trading activities between protocols and protocols. The better the transaction frequency and liquidity, the more we can get incentive. With the rapid increase in transaction frequency, the scale of the DeFi market will become larger and larger, and at the same time, users will earn more and more income, thus forming a short-term positive cycle.

Most importantly, DeFi is very friendly in early user training. Many project parties allow users to lend or exchange tokens by providing liquidity pools. Although some fees will be charged, users at least have the opportunity to enter. and reap rewards in it. This also drives more users to run in. In this way, a decentralized financial stack is built step by step, supporting a decentralized currency and network. Instead of trading cryptocurrencies between centralized custodians in the past.

How DeFi Builds Web3

The prosperity of DeFi is mostly reflected in the quantitative indicator of TVL (Total Value Locked), and there are many bubbles in it. But the good trend is that more and more series of financial products are created through composability and programmability, extending a larger market ecology, forming the value protocol layer of Web3, providing financing and payment for Web3 applications , issuance, listing, mortgage lending, synthetic assets, derivatives and other infrastructure. The richness of this value protocol level will pave the way for the explosion of applications in the upper layers of Web3.

As the next trend in the digital economy era, the Web3 stack is huge, and we can put DeFi in a very important position. On the one hand, the important reason why blockchain technology really attracts the attention of the industry is the market value of cryptocurrencies, and the DeFi market, which is also a form of value expression, further promotes the market’s acceptance of the feasibility of decentralization. Inspired by a new paradigm in the traditional financial market, attracting more talents and users to the DeFi market.

From a macro perspective, the open and transparent financial system created by DeFi with the help of blockchain technology is characterized by permissionless openness and transparency of transaction data, and can support all-weather transactions. Compared with traditional financial architecture, it is more Conducive to cost reduction and efficiency increase. Of course, in the overall operation of the financial system, DeFi has not yet formed a complete closed loop. The gameplay of homogeneous products is relatively simple, and there is no real value closure with the real industry.

Web3 compulsory course: Re-understanding DeFi under the Web3 framework

(Internet finance & DeFi technology architecture diagram, picture source network)

DeFi project case study

At present, there are many DeFi protocols on the market, and the more popular ones are Uniswap, Compound, AAVE, etc. As old-fashioned projects in the early stage, they have gained attention in the DeFi boom.

Web3 compulsory course: Re-understanding DeFi under the Web3 framework

In the early days, MakerDAO was considered to be a protocol for issuing DAI loans for various Ethereum tokens. After 2020, MakerDAO changed. It proposed to mint a governance token and distribute it to liquidity providers, which in turn promoted including The demand for all assets, including DAI stablecoins, has resulted in yield farming. The token release of income farming is set at a constant rate. When the market rises, it will increase the dollar value of the token, thereby increasing the activity of the liquidity pool, which in turn increases the demand for DAI, and when the market falls, DAI can be used as a safe-haven Funds, the general trend is rising. Currently, with the development of Layer2 and sidechains, MakerDAO is expanding into every multi-chain world.

Uniswap is a representative of a decentralized exchange based on smart contracts. It plays the role of the entrance to the DeFi world. The highest market value was as high as 30 billion US dollars. Its operation is completely automatic execution of smart contracts, and transactions between users can not be tampered with. Since its transaction price is determined by the proportion of the assets under custody, the transaction behavior will affect the amount of assets under custody. In addition to trading, another function of Uniswap is that users can add liquidity pools, that is, users can list asset trading pairs by themselves. The most important innovation is the AMM automatic market maker, which has been continuously upgraded in the V1, V2, and V3 versions. In the Uniswap V3 version, in addition to the core aggregated liquidity, it also brings multi-level rate control. , range orders, and historical oracles, which greatly improve capital efficiency.

Convex Finance is a revenue protocol based on the decentralized exchange Curve. It is currently in the forefront of the market. It mainly serves two types of users, one is the holder of the CRV token, and the other is the flow of Curve sex provider. In essence, he combines the power of the two so that both parties can benefit from it, that is, let the CRV holders in the market pledge tokens to provide a bonus for liquidity, and the two share the liquidity after the bonus. Mining revenue can be called a one-stop platform.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/web3-compulsory-course-re-understanding-defi-under-the-web3-framework/
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