Opinion: Criticism of DeFi: In addition to more speculation, it is also an amplifier of greed and fear

author   |   WS

edit   |   Colin Wu

(The author's views are personal and do not represent the position of Wu Blockchain)

There is no doubt that the blockchain world is the "Wild West" of our time, and the DeFi field provides a lot of money-making opportunities. I still can't believe that the development of DeFi is so rapid and wild. Head projects such as Aave and Uniswap continue to gain the interest of US-listed companies and institutions; there are countless "DeFi Lego" projects that provide services on the basis of head projects such as Uniswap, such as providing leveraged market making (Alpha/Alpaca), or constantly adjusting positions to find the highest-yielding machine gun pool (Yearn); not to mention the new projects that are constantly launched, cutting new leeks on the new public chain. In this article, let us put aside the belief in blockchain and the vision of the future, and talk about what DeFi is used for now and what is the investment logic behind it.

Why is DeFi on the rise? What problems does it solve?

What problems does DeFi solve? If it does not include providing a quick way to run away with money, the main uses of DeFi at present are leveraged cryptocurrency trading, altcoin trading, and insider trading. DeFi encourages users to use its own platform and provides mining rewards (yield farming), attracting cryptocurrency users to borrow at negative cost, leverage cryptocurrency trading, or quickly and at zero cost to go online and trade altcoins. Users can even complete insider trading in the stock market by trading "synthetic stocks" in DeFi. Indeed, DeFi, whether it is a decentralized lending protocol like Aave or a decentralized exchange like Uniswap, does provide a possibility for future finance, but their underlying assets are cryptocurrencies, and the current biggest use of cryptocurrencies is speculation. This means that the problem that DeFi projects solve is: how to speculate better and more conveniently. They are not even a little bit away from changing the world's financial system.

However, for the cryptocurrency industry itself, DeFi is undoubtedly a revolutionary innovation: when the cryptocurrencies in the hands of the leeks are still several years away from being "developed" to the "stars and the sea", DeFi makes their coins have practical uses! With DeFi, these currently empty virtual currencies can be used to lend to short sellers on Aave to earn interest, and can also be used to do liquidity mining on Uniswap to earn platform coins. After staking mining, the emergence of DeFi gives cryptocurrency holders more reasons not to sell in addition to faith.

DeFi – The greed and panic amplifier of the cryptocurrency market

As mentioned above, the emergence of DeFi provides users with more speculative tools, which is beneficial to the cryptocurrency market as a whole. DeFi not only gives more reasons not to sell cryptocurrencies, but its own mining rewards will increase the demand for purchasing cryptocurrencies. However, the emergence of DeFi has also greatly increased the number and supply of cryptocurrencies, whether it is the emerging DeFi platform coins themselves, or the pyramid scheme coins and air coins generated for speculation.

DeFi has increased both speculative demand and money supply in the cryptocurrency world, which has amplified the ups and downs of the market.

In a bull market, the users and new funds in the cryptocurrency circle are incremental. They will be attracted by various forms of "MLM coins" and DeFi mining strategies. The emergence of DeFi provides more liquidity and buyer pressure for the cryptocurrency circle. More transaction demand means higher DeFi platform coin prices, higher platform coin prices mean higher liquidity mining rewards, higher mining rewards mean more miners, and more miners mean more demand for cryptocurrencies, and more demand for cryptocurrencies means a higher overall market value of the cryptocurrency circle. This creates a spiral upward cycle, because as the coin price rises, more new users and funds will participate in the market, which will continue to drive up the coin price.

The negative impact of DeFi on the entire cryptocurrency market is reflected in the selling pressure brought to the market by the "mining, selling and withdrawing" strategy, and various MLM coins and air coins listed on decentralized exchanges. In a bear market, the users and funds in the currency circle are stock, but the mining rewards and new "air coins" of the DeFi platform will continue to flow into the market, absorbing the liquidity and funds of the market like a vampire. Smart investors will use the "mining, selling and withdrawing" strategy to obtain stable delta-neutral returns when the market is unstable: first hedge the volatility of the base currency pair and then participate in mining, then sell the mining rewards every day and withdraw the principal when the rewards are reduced. This is undoubtedly negative for the entire cryptocurrency market. Once the mining, selling and withdrawing strategy dominates the market, the hedging demand of miners will throw out selling pressure in the futures market, and the continuous decline in spot prices will greatly reduce the demand for users to increase leverage, which will lead to a reduction in the lending rate of lending platforms. At this point, the locked position and handling fees of the DeFi platform have also decreased, which has affected the fundamentals of the DeFi platform currency-further promoting the situation of "mining, selling and withdrawing". In addition to the downward spiral brought by the "mine, sell and withdraw" strategy, decentralized exchanges have also made new MLM coins and air coins more rampant. Through DEX, anyone can issue coins and provide new cryptocurrency trading pairs - this is extremely unhealthy for the long-term development of the currency circle, especially in a bear market. These MLM coins can violently increase the price of coins in the short term through high control and built-in "destruction mechanism", but once enough leeks are attracted to invest, the coin issuer can put all the coins into the DEX liquidity pool to drain liquidity, or take away user funds on the grounds of "hacker attack". Although the entire currency circle users are extremely disgusted with supervision, if new users lose all their money on a zero-sum MLM coin mining project, this is not what we want to see.

What is the future of DeFi?

As long as central banks around the world continue to find excuses to provide excess liquidity to the market in the future, as they do today, and real income yields continue to be negative, there is no reason why more financial institutions will not try to invest in cryptocurrencies and take a share of this lucrative field to ensure that their income does not lag behind the speed of central bank printing money. This is also the source of the interest of major financial institutions in DeFi mentioned in the previous article: even in the bear market of the currency circle, the 3% stablecoin deposit rate on AAVE is better than any money market fund in the traditional financial market. The problem is, when the central bank finally has to close the valve of excessive money issuance, speculative demand drops to freezing point, what application scenarios does DeFi have? Maybe one day, we will return to the essence, NFTize commercial bills, remove banks through decentralized means, and provide short-term financing for enterprises? Or perhaps with the outbreak of the metaverse, more of our GDP will be generated in the virtual metaverse, and DeFi will be the basic pillar of the metaverse economy? In any case, the DeFi we see today is supported by virtual cryptocurrencies, and the main demand behind cryptocurrencies is speculation.