Chang Yong: The success of DeFi lies in decentralization

The core of the recent DeFi craze is the success of decentralized exchanges (DEX). This is not accidental, but a re-emergence of the great power of "decentralization" in the crypto economy. This success is the natural evolution of the decentralization of basic currencies and asset issuance in the financial field.

Since the 1980s, people have been trying to use asymmetric cryptography to build an endogenous currency system for the Internet, but all have failed. Satoshi Nakamoto summarized the experience and lessons and believed that the main reason for the failure of predecessors was that these currency systems relied on the center. He believed that only decentralization could break away from the credit of third parties and establish a successful cryptocurrency.

In 2009, Satoshi Nakamoto introduced a distributed consensus mechanism based on asymmetric cryptography technology and built a decentralized currency system - Bitcoin. He also created a technical framework for humans to build a decentralized social and economic system - cryptographic consensus (asymmetric cryptography + distributed consensus), which we often call "blockchain."

From only three people participating in its launch in 2009 to becoming a household name around the world in 2017, Bitcoin has been declared dead hundreds of times, but it has survived and achieved huge success. Its vitality lies in "decentralization."

"Decentralization" brings high efficiency to the cryptographic consensus system.

The efficiency of the decentralized currency system built by Bitcoin is far higher than that of the centralized currency system - the banking system. A wallet developed by a team of 10 people can provide Bitcoin currency collection and payment services to users all over the world, while the corresponding banking business requires huge consumption of manpower, material resources and financial resources. High efficiency is the root of Bitcoin's success.

"Decentralization" makes the cryptographic consensus system impossible to kill.

Under the premise of being able to improve economic efficiency and thus have supporters, the decentralized structure ensures that such a system can always survive. Bitcoin has gone through various attacks and containment, and its price has fallen by more than 80% more than once, but it has survived tenaciously. Only by "not dying" can we wait for success.

Bitcoin has achieved the success of decentralized cryptocurrency. Crypto tokens in 2017 have achieved the success of decentralized securities issuance and circulation. The key to success also lies in the benefits of decentralization: 1) high efficiency, 2) immortality.

The issuance and circulation of traditional digital assets are very costly, the process is long, and the circulation range is also limited to the center. However, issuing securities based on ERC20 only costs a few dozen yuan and can be done within an hour, and once issued, it can be circulated globally. Even if 94 was banned, it failed to stop its outbreak.

Now it seems that most of the projects that issued tokens back then failed, but the failure was due to the lack of supervision and the impulsive investment and financing, while the free issuance and circulation of crypto assets was indeed successful. The most typical case is USDT, which has become a token issued and circulated on multiple public chains, and its market value is second only to BTC and ETH.

The core of this round of DeFi explosion is the success of decentralized exchanges (DEX). After achieving effective incentives for liquidity providers through liquidity mining, the power of decentralization has once again emerged. People flocked to DEX to provide liquidity, achieving a better exchange experience, lower costs, and higher autonomy than centralized exchanges. Uniswap's trading volume has exceeded Binance.

Dex provides higher efficiency than centralized exchanges. Even if some projects fail in the competition, Dex provides a free exchange and pricing mechanism for cryptocurrencies and crypto assets, which is irreversible. High efficiency and longevity are also the basis for the success of Dex. We have seen that major exchanges have actively embraced DeFi.

So far, in the financial field, base currency, asset issuance, asset circulation, asset exchange, and asset pricing have all been decentralized, and the decentralization of lending and financial derivatives is also evolving rapidly. DeFi will have an increasingly greater impact on traditional finance.

At present, the biggest problem of DeFi is that finance fails to serve the economy. The efficiency improvement brought by financial decentralization is mainly used for speculative activities, but cannot serve other economic fields and obtain continuous returns from the huge economic dividends brought by these services. To solve this problem, decentralization needs to be realized in more areas of the economy.