The decline of DeFi was doomed the moment the exchange contract leverage was launched

Some time ago, I published an article explaining the end time of the DeFi bull market. At that time, it was estimated to be mid-October. As a result, the market accepted the fact that the currency price fell a few days ago. Now that one-third of October has passed, various DeFi projects are still in a rebound market, which is a bit like the 1CO in 2018.

After the 1CO frenzy in 2017, the market entered a bear market in 2018. Most 1CO projects were severely undervalued, and the market financing also entered a cold winter. However, in fact, there are still some high-quality projects that have received attention, which shows that the market clearing behavior will definitely happen at some point, and then the market will enter rational behavior. For example, many high-quality projects are now raising funds on websites such as coinlist, and the investment threshold has become relatively high. At least most cryptocurrency investors do not think that participating in public offerings can guarantee making money. This is also the market's education process.

Similarly, for the DeFi bubble, the clearing of the bubble will also make the screening and compliance of DeFi projects begin to be put on the table. Since Aave obtained a license, the hackers of KuCoin used Uniswap to launder funds. In fact, we have vaguely seen that the regulation of DeFi may become mainstream in the future. The author has also written related articles to remind us of this, and it was also a warning when DeFi was the hottest.

At present, the money-making effect of DeFi is decreasing, and the risks of liquidity mining are increasing. Many examples of losses have actually educated some people and made them keep a rational mind about participating in such financial experiments. This is a good thing for the market in the long run.

The decline of Defi is actually caused by multiple factors. Not only is the bubble big enough, but it also brings more scams and coin issuance projects. Therefore, in this case, many anonymous project parties began to copy and apply the code at will, and then issued a coin, and finally the market took over. Moreover, the legal risk in doing so is very small, because all transactions are decentralized, so they cannot be tracked. Unless the project party wants to run away, otherwise basically they can only swallow the leeks themselves.

At this time, mainstream exchanges saw the opportunity and launched leveraged contracts and long and short tokens of DeFi tokens. This was a bad warning. These were mainly concentrated in late August and early September. The most impressive one may be the uniswap token UNI.

We all know that most digital currency exchanges are basically cautious about opening contracts and leveraged transactions. They generally choose tokens with relatively small volatility and close to the mainstream for leveraged and contract transactions, such as Bitcoin, Ethereum, Litecoin, EOS, etc. In fact, these currencies have a wider audience and a certain reputation. The price fluctuations are relatively small, and the spot trading market volume is also large. They are not easily affected by short-term selling pressure or other factors. Therefore, these mainstream currencies are the best subject matter for contracts.

People who do contracts generally like to do mainstream coins because they are less affected by the operations of large users, or simply the market makers who manipulate the coin prices. Therefore, basically all exchanges will not cross this line.

But in the DeFi market, many DeFi tokens have begun to open contract markets, whether mainstream or non-mainstream, basically all of them. At this time, participating in the contract market of DeFi tokens is basically a form of gambling.

So why do DeFi token exchanges like contract trading? What is their purpose? To understand this, we must first understand the basic principles of contract trading.

Contract trading is generally divided into two directions, one is long and the other is short. Long means borrowing stablecoins from the market to buy the underlying tokens, and then selling them to repay the money when the price rises, leaving a profit. Short means selling the underlying tokens from the market, and then using the money from the sale to buy back when the price drops, repaying the tokens and leaving a profit. A key point here is that someone must be willing to lend stablecoins and the underlying currency.

However, the actual situation we see is that the current market for stablecoins to earn interest on deposits is actually quite large, that is, the business of lending stablecoins to other people to buy coins. For DeFi tokens, the market for earning interest on deposits is not large, and it mainly depends on various DeFi applications, such as compound and aave, etc. However, this cannot satisfy the appetite of exchange contracts. All exchanges will make bets with their customers.

In this way, it is actually very easy for us to imagine that since the exchange allows short selling, then naturally there will be people who short sell to make money. If the price of a currency does not pull back after the contract transaction of a currency appears, then this is the most terrifying thing. In the end, either there is a problem with the exchange or there is a problem with a big investor.

In this way, we can actually imagine the decline of DeFi tokens. In fact, to a large extent, it is because the exchange has opened contract trading, allowing some large capital users to have their own short-selling channels and "ship" by the way.

In this case, the boss of the FTX exchange actually taught us a very valuable lesson, which can be seen by people all over the world and can be checked on the blockchain. Such magical operation also provides a typical case for the market.

First, use wbtc as collateral, then borrow defi tokens and stablecoins, recharge the defi tokens and stablecoins into the exchange, then open a short order, and then smash the market. In this way, the short order will be profitable, and then buy the currency at a low price to make a profit.

One point here is to use wbtc as collateral. Many people may not pay attention to this detail. In fact, it is mainly because these are all on-chain operations, which are actually very easy to be targeted. For example, if the collateralized currency is dumped by others, it is equivalent to that the collateral position may be attacked. If a liquidation occurs, it will be very serious. Therefore, it is generally necessary to choose currencies with relatively small volatility, such as wbtc and stablecoin usdt. In this way, even if someone wants to launch a sneak attack, it is still too difficult for them to dump Bitcoin and cause a liquidation. Therefore, this avoids the risk of being attacked from the rear.

As for why the big guys do this, the reason is actually very simple, it can achieve profitable shipments, and it is efficient and fast.

To put it simply, if I have uni worth 1 million in my hand, then if I want to sell it, directly smashing the market will reduce my income quickly. After the smash, the price of the currency will fall, and it will also attract more followers to smash the market. Therefore, in this way, although you see uni worth 1 million, when it is finally converted into USDT, it is very good if you can maintain 500,000.

The initial crash was a fuse that led to the final cycle. So how to solve the problem of big guys selling? Naturally, short selling is a good choice:

This actually explains why exchanges are flocking to open contract transactions for defi tokens. This is because exchanges actually understand the logic behind it best. They also understand the needs of the big guys, which is how to make money in the market. Naturally, where there is demand, there is a market. Therefore, for the big guys, opening contract transactions for defi tokens is something that everyone expects. In this way, they can make money by crashing the market, so naturally they are willing to do it, and at the same time they can firmly control the market position of CEFI and exchanges.

From this perspective, the end of DEFI actually began as early as when exchanges opened contracts and leverage, and now it is just a finishing touch.

Of course, in the end, most people are still concerned about how DEFI will develop in the future. In fact, the main core of the future development of DeFi is still regulatory compliance and code security. As for new ways of playing, they have been basically fully developed as early as the bubble period of more than two months. Now there are no newer and more interesting ways of playing. This means that even if new projects emerge in the short term, they are more of an application of other mature ways of playing. For the revolutionary innovation of DEFI, it has been overdrawn and it will take a lot of time to make up for it in the future. In this way, DEFI will go the old path of 1CO again.