DeFi's path: how far is it from agreement coexistence to a wave of industry consolidation?

The Great Merger Movement: DeFi Edition

The originalWriter: Token Terminal 

0x33, BlockBeats

Why would we expect the integration of decentralized financial products

This article attempts to explain why the current experiments with DeFi will eventually lead to a wave of mergers from the leading DeFi protocols. Most emerging industries begin to diverge and merge as they mature. They usually move forward predictably through a clear integrated lifecycle.

From fragmentation to integration

Most emerging industries begin to diverge and merge as they mature. They usually move forward predictably through a clear integrated lifecycle:

Open:A start-up emerges from a newly deregulated industry.

Size:Major players began to emerge, acquiring competitors and forming empires.

Focus:The company is focused on expanding its core business and continues to aggressively outperform its competitors.

Balance and alliances:Big companies align themselves with their peers because growth is now more challenging; Companies defend their leadership.

Currently DeFi is still in a highly fragmented open phase, with a large number of similar protocols handling the same and/or adjacent use cases.

Synthetic asset agreements abound

The easiest way to classify DeFi protocols is to put them all in the same basket, since all financial instruments are ultimately currency derivatives. But taking a more granular approach, this article considers synthetic asset protocols -- such as MakerDAO, UMA, Synthetix, Yield, Opyn, and so on -- that seem to be working in a pattern: asking users to deposit collateral for the asset, generating synthetic collateral for the asset, and having the value of the synthetic asset track a predefined price feed.

Although these agreements differ in the parameters that guide the synthetic asset creation and redemption process. The difference between them becomes apparent when we observe them carefully. For example, what collateral assets are backed (cryptocurrency - cryptocurrency/cryptocurrency - dollar), how much collateral is required to be deposited at any time to secure synthetic assets, what price feeds are used (what synthetic assets are supported), and how to determine their prices.

It is not bad to go it alone

At this stage of industry maturity, there are several good reasons for similar DeFi protocols to co-exist. First, it makes sense for the protocol to focus on a synthetic asset (such as a stable asset) before extending to other assets. Providing multiple compositions adds to the complexity of governance. Increasingly complex problems can be solved by hiring a professional management team with clear responsibilities, which MakerDAO is already trying to do.

Second,The bulk of the experimentation is also the result of the economic opportunities that lie ahead.There is plenty of room for DeFi to grow, which means there is no reason for the founders to give up. Finally, for a particular use case, it is beneficial to the user if there are always at least some viable alternatives available. Encryption is a response to the "too big to fail" of traditional financial institutions -- it is important for DeFi not to repeat the same mistakes in the native environment of the Internet.

The protocol can manage multiple synthetic assets

Traditional financial institutions manage many different (synthetic) assets at the same time. Because encryption protocols are software-based instantiations of these institutions, there is no reason why they should not support a variety of different synthetic assets -- as we saw in the Synthetix protocol. The key to extending the scope of supported assets (governance) is to eliminate or minimize governance entirely, or to delegate governance to a professional management team.

Decentralization or community governance does not mean that everyone in the world participates in the governance of encryption protocols.On the contrary,It means that open source organizations have removed all artificial barriers to participation.Nonetheless, it is logical that the most superficial stakeholders (the core team and major investors) tend to lead the governance effort, at least initially.

Protocols grow through network effects

Like companies, the growth of protocols is the result of network effects.The bigger the deal, the more likely it is to expand through acquisitions, rather than developing everything in-house.When we look at DeFi protocol governance, we can see that it consists of two main components: collateral and oracle management.

1. Collateral management has network effects

It is better for an agreement to have a large, diversified, liquid pool of collateral than a small, single, non-liquid pool of collateral. The size of the collateral pool increases issuance capacity, diversification reduces risk, and liquidity improves safety and availability.

Note: MakerDAO and Compound recently introduced support for encrypting dollars, such as USDT and USDC. This has received some criticism, and we think it is unfair to some extent. In the long run, the use of cryptocurrency as collateral does not affect the open source nature of projects like MakerDAO or Compound.

First, support for these assets is determined by governance, which means that support can always be withdrawn at a later date.

Second, if cryptocurrencies are confiscated, it will only affect the specific synthetic assets they support -- the protocol itself will not be affected (except for potential reputational damage).

Third, because most of the people in the Main Street are small businesses, small workshops and ordinary people, they represent the interests of the people in the Main Street, or the interests of the Main groups in the society. Going into cryptographic systems to make transactions more efficient -- not because of a distrust of the dollar -- makes sense. On cryptographic local currency. ETH's demand is likely the result of problems or restrictions that ordinary users encounter when using cryptocurrency for transactions.

Finally, management stakeholders should be encouraged to use crypto dollars to increase the size, diversification, and liquidity of the collateral pool if they believe that the benefits of adding crypto dollars outweigh the risks.

2. Predictive machine management has network effects

The longer oracle works as a token holder as a verification node, the less likely it is to fail -- in other words, the better it is designed -- and over time it should attract more usage. Because both collateral and oracle management have built-in network effects, you can expect some very valuable protocols to emerge in the trial phase that DeFi is currently conducting.

Big deals grow through mergers and acquisitions

Let's consider a scenario where MakerDAO has successfully increased the adoption of DAI, its currency, and the agreement is now seeking growth by introducing DAI supported synthetic assets (which have been in the MakerDAO roadmap for several years).

Let's also consider that UMA has been able to work for three different synthetic assets simultaneously (sGold, sS& P500 and sTSLA) build highly successful and liquid synthetic token contracts.

MakerDAO can now start from scratch by copying these contracts, or it can decide to acquire UMA and its contracts and put them under the governance of MKR token holders. The MKR token holder will then be entitled to use the sGold, sS& Cash flow from P500 and sTSLA contracts. The purchase price will be determined by calculating the discounted cash flow NPV of UMA's three contracts and adding them together. To raise the offer, MKR token holders will likely also offer some sort of takeover premium to UMA token holders.

Let's assume that the MKR token holder will value the UMA contract for $300 million, including the acquisition premium, and that the UMA token holder will vote in favor of the acquisition proposal. Then the acquisition could happen, so MKR token holders could issue new MKR tokens worth $300 million, or sell their own tokens on the open market and use the proceeds to pay for the acquisition, or issue tokens directly to UMA token holders.

In both cases, the UMA token will be exchanged for the purchase money and eventually destroyed, and then the governance of the UMA synthetic asset contract will take place under the governance of the MKR token holder.

conclusion

DeFi is still in the experimental stage and a large number of different protocols handle similar or adjacent use cases with highly similar protocol designs. As collateral and oracle management best practices become clearer, we should see some agreements emerge as clear "winners." The winning deals will then have an incentive to grow through acquisitions.

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