DeFi in 2020: A Song of Ice and Fire

In the blockchain industry this year, everyone is talking about DeFi, which is all-encompassing, including oracles, lending, decentralized transactions, and public chains. Some people also say that DeFi has ushered in a second spring for public chains. Some projects even see the popularity of the DeFi concept and rigidly link their projects with DeFi.

In addition, DeFi has also spawned countless wealth effects. Most of the "wealth codes" this year come mainly from DeFi. At the same time, many people have suffered heavy losses due to DeFi.

On October 25, at the 2020 Blockchain Annual Ceremony and the Second BoChain Finance "Star Power" Awards Ceremony, BoChain Finance specially invited Chain Hill Capital (Qianfeng Capital) Co-Founder Steven, Conflux Business & Technology Director Shangshu, Cocos-BCX Technology Contributor Reed Hong, BP Accelerator Co-founder Tang Shi, JuBi Labs Partner Liesa and Zenlink China Head Guo Tao and other capital parties, public chains, project parties, investment institutions, and incubation institutions who are concerned about the DeFi field to talk about the ice and fire DeFi market in 2020.

The following is a transcript of the DeFi roundtable discussion (slightly edited by BoChain):

Moderator | ByteLink founder Du Chao: Before the outbreak in the first half of this year, we were mainly concerned about the reduction of Bitcoin production, and in the second half of the year, it was DeFi. Today's roundtable discussion is very good in terms of the breadth and depth of the content. I remember that the concept of DeFi came out in 2019, and it was particularly popular in 2020, especially the peak of locked funds reached more than 7 billion US dollars. What are the inevitable factors for the popularity of DeFi this time? What are the special coincidences?

Chain Hill Capital (Qianfeng Capital) Co-Founder Steven: Although this topic is a commonplace, it is still always new. Qianfeng Capital has been studying the DeFi sector for a long time. Most people saw the popularity of DeFi in the second half of 2020. But in the true sense, DeFi was already quite mature in the second half of 2019, and in the first half of this year, the data has begun to show obvious results. Let me give you a few examples: At the beginning of the year, Kyber Network's transaction volume increased week by week, and in March, the transaction volume exceeded several orders of magnitude; another is Compound, which issued coins in the second half of the year, but in April, its deposit and loan balances began to rise significantly, and the main growth was completed in the first half of the year. So we saw these signs in the first half of the year and predicted that DeFi might have such an explosion in the second half of the year. In fact, there was indeed an unexpected growth.

If I have to explain the reason, I think there are two reasons.

First, the soil of Ethereum. You can see that basically all DeFi or the ones that really exploded this year are based on ETH. Why is this so? It is because of Ethereum's accumulation of strength in the past two years. You can see that ETH is still the ecological chain with the most developers, and Solidity is still one of the blockchain languages ​​with the most users. The complete ecological closed loop allows DeFi to grow. I think this is a very important point, that is, your developers must have a better ecological atmosphere to build these products. I think this is a prerequisite for DeFi to come out. The corresponding choice of track is also a very important premise. Bancor's switch from EOS to ETH this year is a very wise choice.

Second, in 2019, it would be very difficult for people to use DEX, or they would be reluctant to try. People have been in the blockchain industry for so long, and it has only been in recent years that they are willing to spend time and energy to learn some so-called introductory knowledge of decentralized finance. Or the threshold is not so high now, and users are gradually becoming mature, so some people will really use these DEXs. One is the soil, and the other is the users. These two points will inevitably determine that DeFi can have a relatively large development.

If we talk about the accidental factors, the first one is the extreme market situation on March 12. In fact, March 12 was not just a big clean-up of the cryptocurrency or blockchain industry, but a big clean-up of the entire financial market. As we all know, the entire A-share market and the US stock market experienced a very large drop of more than 30% during the March 12 period, so the subsequent incremental funds did not know where to go, and they were quite panicked.

So gold suddenly soared from $1,600 to $2,000. The same is true in the cryptocurrency world. After 312, many people were panicking about whether the DeFi industry was going to fail, and whether the largest decentralized stablecoin DAI was going to fail. But it didn’t. Not only did it not fail, but it also repaid all the debts caused by the price drop, and it did so in the form of collateral auctions. This is a particularly responsible behavior.

As a result, these funds can only go to DeFi. In other words, it is not that DeFi is so powerful, but that its opponents are too weak. If you have used DApps on EOS, you will know that the user experience is relatively poor. So at the right time, after 312, the funds were reshuffled and met the right people. This wave of people on DeFi on ETH just created such a thing.

Shang Shu, Business and Technology Director of Conflux: Inevitability. I feel that DeFi has found its own essential logic. DeFi connects financial markets around the world that cannot be connected to each other due to policies or national licenses through smart contracts. After the financial markets are connected, the cost of obtaining capital globally will become averaged. For example, Europe and the United States have had negative interest rates, but China's GDP is still growing at an annual rate of 5% to 6%. The cost of funds here is actually higher, but the cost is relatively low in Europe and the United States. A person who keeps money in a bank may lose money, but if he finds a way to invest the money in a third world country, he can make money.

However, for various reasons, these people are unable to invest their money in these places. The basic logic underlying DeFi is that it can allow the money to flow freely around the world, and the cost of capital acquisition in all parts of the world can be averaged. This is a great ideal.

The explosion of DeFi in 2020 feels a bit early. Even today, the essential logic of DeFi has not been figured out, and excess borrowing has not found a realistic scenario. So DeFi has been working on this for 2-3 years. It has made a lot of money this year, and we hope that these projects can continue to do this in the next 2-3 years.

Reed Hong, technical contributor of Cocos-BCX: I have been involved in DeFi since the end of July, and I feel that there are several points that make DeFi popular:

First, the entire crypto market has existed for more than two or three years, so everyone has a need to increase the value of their basic funds.

Second, market expectations. Whether it is Bitcoin halving or Ethereum 2.0, everyone has high expectations for the market.

Third, after so many years of development, Ethereum has many high-quality assets, and DeFi based on Ethereum has the most basic soil for existence.

Fourth, I think it is definitely a new model. The liquidity mining model has triggered an inevitable point in the industry. The huge wealth effect has made many people want to follow suit. This is the fundamental reason why DeFi is being discussed by everyone.

Tang Shi, co-founder of BP Accelerator: Let me talk about the inevitability. Decentralized finance (DeFi) should be the first point that blockchain can be perceived and applied by everyone, and it can derive greater value from the original value of digital currency. It is undeniable that there are more and more cases and channels for blockchain to link with entities. Whenever the market is not good, everyone will talk about chain reform. Chain reform is moving forward, but financial decentralization and centralization will be the first step to be achieved.

Then there is the randomness. In 2019, people were more likely to hype up low-end projects, but at the beginning of 2020, there was the concept of Bitcoin halving. In May, Compand came with super high mining returns. The mainstream currency circle needed a point that could make users more involved. The biggest starting point for this wave of DeFi popularity is still profit.

Liesa, partner of JuBi Labs: I have always believed that the crypto economy itself belongs to the financial industry. The application of decentralized finance (DeFi) has existed before, and the recent popularity is a normal logic. Whether it is a centralized exchange or a decentralized application, the essence of the crypto industry is still centered around transactions. It is normal to make a series of innovations around finance, even if it is very simple and crude at the beginning, and it may even be regarded as "treasonous" by the traditional financial industry. This is also the value of the crypto industry. In addition, many investors in this industry make money, and then take a small amount of funds to test the waters of DeFi, which is also a normal investment logic.

Guo Tao, head of Zenlink China: The popularity of DeFi this year is jointly stimulated by internal and external factors. Internal factors refer to the development of the DeFi track itself. Let me first talk about what Zenlink is doing. We hope to build a very basic protocol. The good thing about the guests at this roundtable is that there are many project parties. There will be different points when talking about DeFi in this environment.

Why is Zenlink doing this? We have seen that in the wave of Ethereum bringing DeFi up this year, the previous public chains have begun to do cross-chain things. Polkadot is very excellent in terms of the underlying architecture, and even has an absolute monopoly. We have our own thoughts in it. The future blockchain will be an era of interconnection of thousands of chains. Various application layer protocols will emerge based on the rhythm of interconnection of thousands of chains, so Zenlink hopes to create a simple and ultimate infrastructure.

Let’s talk about the reason why DeFi has become popular. The intrinsic value of the industry itself has been discovered. This has taken two to three years to accumulate and is reflected in several aspects.

First, the underlying assets are well settled.

Second, from the perspective of the external environment, whether it is the industry cycle or the market heat, the characteristic of this industry is that various concepts will emerge very quickly, be verified very quickly, and begin to generate bubbles. DeFi is a very typical example.

In 2017, the concept of public chain was discussed. Recently, the smart contracts on Ethereum have been continuously improved, and some products have been launched, which has led to the popularity of DeFi. It just happened to conform to the lack of hot spots in the market during this period. So I think DeFi is mainly caused by these two reasons.

Du Chao, founder of ByteLink: The answers from all the guests at this roundtable today are very interesting. Some guests think that the rise of DeFi is ready to go, and has been prepared for two or three years. Of course, there are many changes and innovations. Some people think that the blockchain industry and encrypted assets are also a financial industry. Of course, there are many people who need to find a hot spot. I agree with all the views. I personally think that existence is reasonable.

Host | Du Chao, founder of ByteLink: We define this wave of DeFi as the emergence of a new way of playing. What do you think the centralized exchange (DEX) Uniswap can do? One dimension is learning and reference, and the second dimension is the difficulties that may be encountered. Can we discuss this together?

Chain Hill Capital (Qianfeng Capital) Co-Founder Steven: Uniswap is a phenomenal existence, but with so many people at the event, the possibility of people actually getting 400 UNIs is not very many. The people who actually participate in it are 1% of the 1%. Looking back, why Uniswap can achieve explosive growth, even after everyone thinks that the DeFi craze is over, it still has a transaction volume of 100-300 million US dollars.

Therefore, the entire DeFi market currently accounts for 5%-10% of the total transaction volume, including centralized exchanges. This is a particularly scary figure, because last year or the year before, this figure only accounted for one thousandth or even nothing.

I think there are three points about UNI that are particularly worth learning.

First, from the perspective of product thinking, a DEX or other APP, in order to retain users, must fundamentally change the user experience. Uniswap's transition from OrderBook to AMM is a very open and epoch-making event.

Because the original DEX was very difficult to use, you didn't know which one to click when you entered, and you couldn't trust the UI. But Uniswap fundamentally changed this thing, and I think this is the first and most important thing it did, whether it was switching to AMM or making very simple interactions, it made this product truly usable from the perspective of user experience.

Second, Uniswap was one of the first to try liquidity incentives, and its liquidity incentives were not like the later YFI (yearn.finance) or creating a token. Many DeFi coins later gave you a so-called 1,000-fold return, which is actually a non-existent thing. From the beginning, UNI’s return for pledged liquidity and pledged trading pairs was ETH, and there was no UIN token at the beginning. This is something that is particularly acceptable to pledged miners or participants.

Third, I think UNI also did one thing. It did not issue tokens too early. As we all know, many of them, including Sushi, issued their own DeFi tokens before or shortly after they went online. UNI's issuance of tokens is more or less forced by Sushi, because if it did not issue tokens, its stake would indeed be stolen by Sushi.

So, looking back, if you really have the ability to do this, there is no need to involve tokens in this process too early. Many times, tokens will distract the attention of the entire project or the value of the project itself. UNI has done a good job in this regard.

Shang Shu, Business and Technology Director of Conflux: I have said so much good things before, let me say something bad. I think UNI has existed for a long time before this wave of DeFi, and before this wave of DeFi, UNI’s main customers were CX projects, because only users of CX projects could use it with the fluctuation of currency prices, yield, and the difficulty and high handling fees.

The same is true for this wave of DeFi. If those DeFi projects cannot support such high returns, I believe that most users will have no motivation to use UNI, because the transaction fees are simply outrageous. This is the first problem.

As for the second question, I haven’t calculated it specifically, but at least from the current perspective, it should be cheaper to list on UNI than on centralized exchanges. However, if centralized exchanges reduce their own yields and the cost of listing, they will soon be able to regain lost ground. The cost of market making on UNI is not low. A large number of tokens and an equivalent amount of USDT or Ethereum must be injected into the liquidity pool, and a large amount of uncompensated losses must be borne in the process. There will be a lot of losses for the project, and the slippage of users is also very large.

However, for DEXs such as UNI, now is a good time point. At this point in time, major centralized exchanges are still willing to charge high listing fees. If this trend continues, the competition between the two will become more intense. The benefit of UNI to the industry may be to reduce the listing fees of the three major exchanges, which is also very impressive.

Reed Hong, technical contributor of Cocos-BCX: I have personally read the UNI contract very carefully, and I will mainly talk about it from a technical perspective. Now looking back at DeFi, the Ethereum community is really a large developer community. The entire UNI code is amazingly written. The core exchange logic can be implemented in less than 200 lines of contract code. Every line of code on UNI is not redundant.

In particular, the implementation of collecting fees is very clever. UNI charges 1,300 yuan in fees. How is the fee collected? The implementation logic is very sophisticated. There are so many 1,300 yuan in fees for each trading pair, and there are probably thousands of trading pairs. When trading, for example, if I want to exchange 100 million Ethereum for USDT, 0.3% of an Ethereum is deducted and put into the liquidity pool. The LP in the pool shares the income at this moment. The fee is received when the LP leaves. This is a very intuitive feeling. But I didn't see the 1,300 yuan reflected, and it was distributed to everyone together.

He said that he would charge a handling fee of 15,000 yuan, but he has not charged that fee yet. The whole implementation is also very ingenious. At the bottom level, you only need to design an address to collect the fees, and the algorithm implementation is very sophisticated.

Tang Shi, co-founder of BP Accelerator: I have talked with many teams, and we all agree that UNI's front-end is very good. We talked about the AMM mechanism. For large accounts, the slippage is really low. When talking with the technical staff about the optimization space of the AMM mechanism, we found such a problem: the disadvantage of the new arbitrage method is also slippage. The method is to insert a higher fee order before seeing a large buy order. The buy order slippage is relatively high. The price is bought up and then an order is issued to adjust it back. Basically, the rate of return for each hacker can be 15-20% . This is also a disadvantage. It can be adjusted in the new product. I feel that there are no particularly good products now, and I look forward to it.

Liesa, partner of JuBi Labs: I started out in the public chain industry, and the essence of the industry I talk about is still the financial industry. This is why the U.S. stock market is still the craziest financial market in the world no matter how crazy the president gets. If your money is big enough, you will definitely invest in U.S. stocks, because only that market can afford your funds. UNI's technical team is very reliable.

The so-called technology finance must be finance first, technology as an aid, and completed through certain means. We cannot be bound by some traditional financial thinking. How should market makers calculate pricing and costs? Will they lose a lot? I think some people will lose a lot, but some people will make a lot of money. I think this is unacceptable to people in the traditional financial industry.

Traditional financial thinking is really not suitable for the cryptocurrency world. UNI can stand firm in the race, which means that its community and investors have basic recognition of it. We definitely want to continue on the path of DeFi, and we still have to do what it brings us.

I am a senior option seller. Is there any way to improve everyone's rate of return? I think these are all the thoughts UNI brought to me. There are many ideas that need to be supported by technical means. Many technical partners should increase their understanding of the financial industry and think about how to use technical means to support very groundbreaking ideas. I think this is the right way for this industry to go. Don't get stuck in a dead end and ignore the essence of this industry. The US stock market can come out because it can bear the world's largest investment amount. What is the greatest value that our industry can bear? This should be thought about.

Guo Tao, head of Zenlink China: I would like to jump out and talk about what UNI means to the industry. This industry has never lacked controversial points. Now when we talk about DeFi, sometimes we talk about the future of decentralized and centralized exchanges.

Blockchain is about decentralization. Regardless of whether it has financial or other attributes, it has an essential existence at its core. This is also the biggest difference between us and people from traditional Internet companies, including Ant Financial and Tencent. They are also now planning blockchain, but their genes are definitely not the same as ours.

The biggest impact of UNI is that it makes the industry want to decentralize, but we have done a lot of centralized things, which makes the entire industry want to decentralize. In the future, this industry will be on a more radical decentralized path. Polkadot has two main networks, and the positioning of the chain circle and the currency circle is to explore the path of decentralization. At present, it seems that a better direction has been found, which is DeFi.

It is obvious that DeFi or DEX has encountered a bubble, which means that products, innovations and the underlying layers have encountered technical or product bottlenecks. Next, we will definitely think about how DeFi should go? DeFi or DEX itself is the most important for our industry. The essence of blockchain is still about transactions, and the core of this is DEX. Let us think about where DEX will go next? From my personal point of view, although Ethereum is the most successful public chain with the most successful products and contracts, it is definitely limited in terms of technical architecture. Cross-chain is not a false proposition and concept. Next, cross-chain will definitely enter the bottom layer of all public chains and blockchains.

For cross-chain DEX, the underlying architecture is in place, and more and more will move to the application layer. The competition in the public chain has died out at present or for a long time. Next will be the competition in the application layer. The first thing to compete is technology, which means that various general protocols will emerge. Some of these protocols may be specially designed for DEX, and some may be for traditional Internet or finance.

Centralized exchanges may start out as spot exchanges, and later become futures and various derivatives. DEX will follow the same path in terms of business model, so we need to lay all of these out from a technical perspective. Only after these are laid out can traditional Internet, industries, and funds move in. Both the technology and the underlying high-quality assets will definitely support the entire building, and we will see more and more "Lego blocks" perfecting the entire industry.

Du Chao, founder of ByteLink: I have also had deep thoughts and feelings about DeFi, and the guests all spoke very well. I have two ideas:

First, the OKU incident proves that it is very likely that the future of this industry will be DEX, there is no other possibility.

Secondly, I would like to raise a small point, which was previously raised by Xiao Feng from Wanxiang Blockchain. This point of view has a huge impact on me personally. That is to say, will there be a technological trend and trend based on blockchain in the future, which may bring about the first stage of drastic changes and impacts, but it may be a technological revolution. Just as the guest mentioned, 200 lines of code can change an industry landscape. This is also a big point that stimulates me, and UNI brings us inspiration.

I think today's roundtable really surprised me. I think all dimensions were covered and it was really perfect.

Host | Du Chao, founder of ByteLink: In the last session, each guest is invited to share in 1-3 sentences what opportunities you think are possible in the DeFi track or innovation field in the next six months to a year?

Chain Hill Capital (Qianfeng Capital) Co-Founder Steven: First, UNI is now a monster in the entire DeFi world, and everyone thinks it is very difficult to surpass or subvert it. But on the other hand, it does have many problems, such as uncompensated losses, and the problem of OrderBook innovation faced by the current iteration to V3. DEX will still be a major direction. Whoever innovates well enough on the next generation of OrderBook, which is both practical and easy to use and can solve uncompensated losses, will have the possibility of surpassing UNI. Another is the Derivative DEX track. If the current spot DEX has reached a bottleneck period, derivatives will be another detonator.

Second, there is still over-collateralization, and no real credit is being created. In the future, DeFi needs to think about how to create credit. One possible direction is the current decentralized identity (Decentralized ID, DID). If this can be developed a little more mature, it can allow everyone's ID in the blockchain to generate positive credit. Adding this to DeFi, in the case of proving credit, it may be possible to generate things that do not require over-borrowing. This can truly benchmark the lending market that creates credit, and there will be greater imagination.

Shang Shu, Business and Technology Director of Conflux: Regarding the subsequent development of DeFi, I have two ideas:

First, what will emerge as the market continues to develop. Second, what I expect to emerge.

Everyone has very high expectations for the DeFi market. They can see an annualized rate of return of thousands or even tens of thousands, and they are still looking for excitement. If the excitement cannot keep up, the craze may end. Many people are discussing NFTs now, but the trading volume of NFTs is too small. If a painting is sold in a traditional trading house, the handling fee is about 20%. What kind of project will give the intermediary a 20% rebate? This shows that this thing is very difficult to trade. The handling fee in the NFT exchange is at least 10%, which proves that the liquidity is very poor. With such poor liquidity, it is difficult to support the current DeFi circle. The only direction that may be able to take over is derivatives . Everyone can raise their expectations again, which may lead to the next wave of climax.

Everything is done in a way that is separate from the fiat currency world. The assets of the traditional fiat currency world are not reflected in the DeFi craze. For anyone, assets are not just coins. There are many assets in reality that may bring me income in the future. Can these things be mortgaged to the chain and combined with digital currency? This is the direction I would like to see. There are also some products in this track. At present, the scale is very small, and I hope it can be done.

Reed Hong, technical contributor of Cocos-BCX: The combination of NFT and DeFi will bring great imagination. NFT is not rare, and it is more descriptive. It is worth looking forward to what new things it will bring. The biggest innovation in the DeFi field is the introduction of new tokens . I think many ways of playing will change.

Tang Shi, co-founder of BP Accelerator: I am very optimistic about the derivatives direction. I would like to add a little about options, that is, index funds. I have always felt that this is quite promising. Then among the existing DeFi products, we feel that there is a track that is not done enough, probably because people are not patient enough. It is a low-frequency product, but in fact it is very necessary, that is, insurance.

On the one hand, we can do it on the native assets of the mainstream currency circle, and on the other hand, we can do it on and off the chain, which is more difficult and will definitely be related to NFT. Another separate point is about NFT.

Let’s imagine boldly, because I know there are teams doing this. Let’s imagine boldly that non-fungible tokens may become important asset targets in DeFi products in the future, or even be considered the underlying asset targets.

Liesa, partner of JuBi Labs: I think it is still a derivative product. Even if you speculate on DeFi, there are already some things about centralization, and it can find its own way in DeFi.

If you want to invest or start a business, you should go the route of derivatives, especially options. I think options are much more complex than futures. Since they are complex, there may be more areas where they can be simplified.

Guo Tao, head of ZenLink China: In the short term, there are only a few hot tracks, and I think Polkadot is a very likely opportunity.

Du Chao, founder of ByteLink: The last session is the most essential part of this roundtable. The guests mentioned that these are expectations and cognitions of the industry on the one hand, because they are engaged in different vertical fields, including investment funds, public chain projects, those specializing in technology, investment research and incubation, and those working on the Polkadot ecological protocol layer.

I think it is very good. If everyone can make the discussion more transparent and three-dimensional, the effect will be better. Finally, I would like to thank BoChain Finance for organizing this roundtable, and thank all the guests.