2019-2020 Cryptocurrency Market Annual Report | Chapter 3: Rapid Increase of DeFi, A New Arena for Traditional Giants (I)
摘要： Since 2019, DeFi-related projects had drawn much attention for two reasons—brand new experiences brought by decentralized finance and the huge amount of fund flows generated by this kind of projects. At present, DeFi in the market can be classified as loans, stable coins, exchange, deviants and payment methods all of which are very promising.
Finance has been the best field for blockchain application. First, blockchain has transformed existing financial system including banking and insurance industry. Second, blockchain is reshaping financial industry with stable coins, decentralization lending and decentralized exchanges. As a result, Brendan, the founder of dharma, put forward De.Fi which seems to be the development trend for blockchain + financial future.
Value locked into De.Fi near USD 1 billion
De.Fi can be understood as a category of FinTech. However, FinTech centers around traditional financial models with improvement while De.Fi relies less on existing system and credits with more advantages in realizing international fund flows. So far, application and services that combines smart contracts and blockchain are part of De.Fi.
Since 2019, DeFi-related projects had drawn much attention for two reasons—brand new experiences brought by decentralized finance and the huge amount of fund flows generated by this kind of projects. At present, DeFi in the market can be classified as loans, stable coins, exchange, deviants and payment methods all of which are very promising.
According to DApptotal, 34 DeFi projects has locked into value of USD 959 million by 13 January 2020. Among these projects, value locked by Maker was USD 359 million, accounting for 37.47% and ranking the first; EOSREX USD, 220 million, 23%, the second; Edgeware, USD 112 million, 11.75%; Compoud, Synthetix, dYdX, Nuo and other De.Fi applications totaled 27.78%.
By now, value locked into by ETH has been up to 3.97 million, making up of 3.64% of the total amount of ETH in circulation; value locked into by EOS has been up to 73.82 million, making up of 7.06% of the total amount of ETH in circulation.
As shown by Binance, the number of monthly individual DeFi users ranged between 40 thousand to 60 thousand in 2019. The smallest number was seen in January while the highest number in August.
1. Ecology of De.Fi
The mainstream decentralized financial applications including payment methods, deviants, stable coins, tokenization and decentralized exchanges.
De.Fi is able to decentralize the payment process which means user can directly send digital currencies to the person that receives money without involving any third party. Examples include Lightening Network and imToken Wallet.
a. Loans: In traditional financial system, loans require very complex procedures. For instance, we have to turn in application materials or pawns for a loan and let alone an arduous long approval time that is low-efficient and inconvenient. However, in the De.Fi loan model, a user is able to form direct loan relationships with another user and digital currencies can be used as pawns in this scenario. Examples include lending startups Dharma and MakerDao.
b. Market predictions: Any user can build or participate in market prediction through an app. The main functions that are currently available include political event predictions, event hedging, weather forecasting, company predictions, etc. Augur is a good example.
Stablecoins are assets with a stable price feature, so it is suitable for transaction media, bookkeeping units and value storage. For example, USDT, a stablecoin issued by Tether, is anchored 1:1 with USD. However, people doubt the solvency of USDT so more options of stablecoins are available on the market such as MakerDAO, GUSD and USDC.
Using blockchain for digitization of real-world goods or services. Examples include STO digitizes ownership of financial assets such as stocks or bonds.
2. De.Fi lending
Decentralized lending has many similarities with traditional financial lending. The biggest distinction is that decentralized lending takes digital currency as pawns and borrowing, and the lending agreement is mainly based on smart contracts. There is no need to benchmark a specific object or institution.
ChainDD Thinktank summarized historical data of decentralized lending platforms over the past year.
May, June and July of 2019 saw rapid growth of decentralized lending platforms and Compound and dYdX rose swiftly during that period of time. This can partly attribute to updated contracts and products in 2019. For instance, Dharma provided simple and handy user experiences for their terminal clients, dYdX released exchanges and Compound had many technological advancements including a new 2.0 version.
3. Decentralized exchanges:
The number of decentralized exchanges has been on the rise. Meanwhile, with the participation of mainstream centralized exchanges, this field has been given more attention. However, not all centralized exchanges are capable of decentralization. We have classified mechanisms of centralized exchanges.
a. Blockchain-based centralized exchanges do not rely on smart contract but build it business on blockchain. Binance DEX is developing in this direction.
b. Mix-model is applied by most centralized exchanges when complete decentralization may result in higher risks of order conflicts and inefficiency.
c. Cash pooling model helps users that initiate transactions to find an optimized price match with smart contract in cash pools.
So far, decentralized exchange in financial sectors have been mostly built on Ethereum public chain from the angle of De.Fi.
Decentralization can solve two major problems of asset safety and transaction auditing. In digital currency market, exchanges are considered as the most stable and profitable form. But security issues have been often seen over the past few years in centralized exchanges and digital currencies that boost decentralization have been impeded by centralized exchanges. Therefore, centralized exchange has been a new development trend.
At present, decentralized exchanges have disadvantage including poor user experiences, complicated operation, worse liquidity and slower transaction speed, which is the main reason that users don’t choose DEX.