DeFi will devour traditional finance and return to active investors

Original title: DeFi will devour traditional finance, return to active investors

Original article by Arthur Cheong, Unitimes

Johnny

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My summary of DeFi's investment theory is as follows:

"In the last decade, software has eaten the world; in the next decade, DeFi will eat traditional finance." & have spent

Why will DeFi devour traditional finance? & have spent

Since the beginning of the industrial era, the global financial structure has remained largely unchanged, heavily dependent on financial intermediaries. Despite significant advances in software technology, much of the existing financial infrastructure remains antiquated and overburdened. While a number of fintech products have emerged over the past decade to fill the gap, they all need to be integrated with the existing financial system to work. For example, the world's most popular e-wallet provider needs to connect to an existing bank account to withdraw money and recharge it.

Photo source: Liberty Games

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Today, however, with the development of & NBSP; a blockchain based on an unlicensed smart contract; With the advent of DeFi, all of this is being revolutionized.

The benefits of DeFi will spread to both developed and emerging markets. In developed markets, DeFi will provide consumers with more choice, reduce the cost of the traditional financial system, and bring greater liquidity and product innovation to the financial markets. For emerging markets, with the rise of the stability currency, DeFi will provide a more secure store of value and provide financial services to the billions of adults who cannot use the existing financial system.

Eventually, DeFi replaced the "credit layer" of finance -- financial intermediaries such as Banks, asset managers, and insurance companies -- with software and code.

By eliminating financial intermediaries and associated costs, DeFi brings the promise of wider access to financial products, programmable currencies, real-time risk transfer, and auditability of financial contracts. This represents a new phase in the development of financial services, characterized by transparency and openness, which will promote greater financial inclusion.

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The financial sector is the largest product/market & cake suitable for the block chain without permission;

For those who follow this area, DeFi is clearly the biggest success story in the encryption space since 2019. DeFi has grown into one of the most active areas of blockchain: DeFi has experienced rapid growth through every measurable metric such as the total value locked in DeFi, user growth, and transaction volume. From currency stabilizers, decentralized exchanges, lending platforms, payment networks, to synthetic assets and asset management, the DeFi ecosystem is thriving.

DeFi's success didn't happen overnight, and it has been built by satoshi nakamoto since he founded bitcoin 11 years ago. However, due to bitcoin's limited programmability, it is difficult to build financial protocols on top of it. With ethereum, this became possible. Ethereum is a permless blockchain with a full smart contract capability on which to build more complex financial applications. As early as 2014, the ethereum white paper mentioned financial derivatives and stability COINS.

Over the years, there have been numerous attempts to use an unlicensed blockchain in other use cases, but with the exception of DeFi, these attempts have failed, such as & NBSP; ICObench  There are more than 100 items on the list, ranging from media to entertainment and even travel, though the initial ICO boom has funded countless such attempts. Moreover, even the integration of the unlicensed blockchain into the supply chain system is hard to support, no matter how many big companies support it.

It is no coincidence that the DeFi project is the only one that is thriving among projects that are trying to build on top of the unlicensed blockchain. The licenseless blockchain is a distributed database optimized for decentralization and openness, at the expense of performance -- a high price: ethereum is orders of magnitude slower and more expensive to compute and store data than cloud infrastructure like AWS.

But finance has always been based on trust, which has historically been based on intermediaries such as Banks, exchanges, insurance companies, asset managers and custodians. Since the industrial revolution, the structure of the industry has remained the same, until fintech emerged in the past decade. While many fintech start-ups have further improved financial efficiency, they are still not universally available and often operate within the boundaries of nation-states.

Compared to other examples, even if there is a trade-off between computing and storing data, it is worthwhile to use the unlicensed blockchain to make financial changes, because financial service providers are always at the level of trust & NBSP; Compete (not at the cost level). DeFi provides universal access to financial services by transforming the trust layer from a financial intermediary to software and code on the blockchain. This represents a paradigm shift in which a user experience with minimal trust is possible. In an era where controlling users' data and digital activities can be a burden, DeFi will be able to offer better products and services than traditional finance.

A good example is the rise of the stable currency, which addresses one of the biggest obstacles preventing cryptocurrencies from being widely used as a medium of exchange because of their volatility. The total market value of the currency has increased fivefold in the past two years, and the total supply is close to $10 billion. The total value of transactions on the ethereum stable currency chain is also greater than ETH's assets.

Source: Nic Carter & "The Metrics

Stable currencies are also filling the gap in demand for dollars that traditional channels cannot meet. The USDT, the largest stable currency by market value in terms of supply, is particularly popular outside the us. The total supply of stable currency will continue to grow rapidly in the short term.

The interoperability and composability of DeFi further accelerates the growth of the stable currency, as different financial primitives can be built on top of each other to provide superior centralization of the same products and services.

For example, whether it's like & NBSP; Aave  Lending platforms like this, like & NBSP; Uniswap  Or & have spent The Curve Finance  Such automatic market-maker liquidity pools account for most of the value locked in the various DeFi protocols. This enables users to generate revenue from currency stabilisation, which is increasingly difficult to achieve in a zero interest rate environment after covid-19.

In less than three years, the total value of locked assets (TVL) applied by DeFi has exceeded $800 million and peaked at $1.2 billion. This area is likely to grow as more users come into contact with DeFi and embrace it.

All of the above factors indicate that DeFi is a prime product/market for a licence-free blockchain driven by smart contracts and will remain so for the foreseeable future.

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DeFi's investment philosophy & NBSP;

All successful investors have a guiding philosophy that guides their investment decisions. More importantly for DeFi, it is important to have an investment philosophy that can help us to participate in this rapidly changing DeFi space. My investment philosophy can be summarized as follows:

Fundamental investment, combined with active participation, will produce the most sustainable returns. Most cryptocurrencies are mispriced, but fundamentals are increasingly important in price discovery.

In the traditional financial sector, the open market has a lower degree of information asymmetry and wider access, which leads to more equitable price discovery and liquidity premium. However, the situation in traditional markets may be the exact opposite of DeFi, a nascent industry.

The fact that the cryptocurrency open market is dominated by non-professional investors, coupled with the lack of widely accepted valuation methods, indicates that most cryptocurrency open market investors do not adopt strict methods when making investment decisions. Usually, prices are determined by speculative passions and memes, and big news and stock exchange listings tend to drive a lot of orienteering.

Given the nature of the public market for cryptocurrencies, many that are listed on exchanges can be priced more unreasonably than private markets dominated by professional investors. This is especially true for cryptocurrencies that are listed on exchanges and have a market value of less than $500 million.

The illiquidity nature of these low-capitalization cryptocurrencies makes them a hedge fund & NBSP; on established cryptocurrencies; (hedge funds) & have spent They lose their appeal because most hedge funds need to maintain liquid portfolios to meet redemptions from potential investors. On the other hand, cryptocurrency risk fund & NBSP; (venture funds) & have spent These low-capitalization cryptocurrencies are often overlooked because these funds focus on primary markets and equities, where they have a greater perceived edge.

For most investors, undervalued cryptocurrencies are ideal investment targets because they offer three times the upside and a limited downside. 30%), but not for venture capital funds (because of the economics of venture capital [1]). This has led to a lack of professional investors in these cryptocurrencies, who often actively research how to effectively discover the price of cryptocurrencies.

A good example is comparison & NBSP; Kyber Network  (KNC) and & have spent OmiseGo  (OMG). Both were launched in mid-2017 to create a decentralised exchange and liquidity protocol, although they took different approaches.

The Kyber Network launched in February 2018 and has already handled more than $1 billion in transactions, but OmiseGo has yet to launch anything at the production level and has repeatedly delayed its milestone. For most of the past 12 months, however, the OMG's deals have been worth far more than KNC's.

However, Kyber Network will soon be upgraded, and KNC will gain better value growth through transaction fee rewards (users will be able to participate in governance by pledging KNC and get transaction fee rewards after the upgrade) and the destruction of KNC tokens.

As of May 24, 2020, OMG's market value was still nearly twice that of KNC. However, considering that the market is forward-looking in terms of the growth prospects of individual agreements, most smart investors are not convinced that OmiseGo has better growth prospects than Kyber Network.

We are seeing signs that fundamentals are playing an increasingly important role in cryptocurrency price discovery. Current events that focus on the fundamentals of the various cryptocurrency chains tend to be widely read: recently, major partnership announcements alone have not driven up prices as they have in the past, while significant improvements and actual traction that can be measured by data are driving more positive price movements.

For example, when the trading volume of Kyber Network increased significantly and gained more market share, KNC began to outperform the market. So far this year, LEND tokens have rebounded sharply as more investors have noticed the rapid growth of the Aave (LEND) platform.

This is especially true for DeFi protocols that can reward token holders through various forms, such as buybacks, destruction, or direct incentive distribution. In addition, such as & NBSP; CoinMetrics  And & have spent Token Terminal  Cryptocurrency analysis tools, such as the cryptocurrency, also help to enhance the importance of fundamentals in cryptocurrency price discovery.

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Active participation is vital when investing in DeFi & NBSP;

There are also different spectra between cryptocurrencies, with some of the more mature cryptographic networks (such as bitcoin and ethereum) being closer to commodities in nature, while most DeFi protocols are more akin to early equity, even though they may be publicly traded.

These young DeFi agreements require active support, including providing liquidity, product feedback, participation in governance, and other community input, to be successful. However, for some DeFi protocols, such support and collaboration may not exist or be lacking. Active investors can fill the gap by offering value in a variety of ways.

The most defensive moat for any DeFi protocol is the liquidity and balance sheet that its platform can attract. Good liquidity is crucial for a decentralised exchange (DEX) because price is the biggest differentiator for users. A loan agreement with a bigger balance sheet can attract more borrowers & NBSP; Paid to lenders (borrowers) and thus improve & have spent (lenders) & have spent The interest rate.

The long-term challenge of guiding both "demand" and "supply" in bilateral markets & NBSP; (i.e. supply and demand challenges)& NBSP; It also applies to the DeFi protocol, which is where active investors come in.

For example, DEX  with an automated market-making strategy; (such as Uniswap) & have spent You need to provide a lot of liquidity at the beginning to use it. Investors who can provide the first pool of liquid capital can capture significant value by removing the first major barrier to an exchange. Similarly, investors who can inject extra capital into pools of loans with lending agreements that are crucial to balance sheets will have a significantly higher chance of earning a return on that investment.

Due to the high level of information asymmetry in the DeFi domain, the positive fundamentals of cryptocurrencies may be overlooked. A widely followed active investor can also increase the exposure of DeFi protocols through support and thought guidance. Most importantly, these DeFi protocols are trusted by investors who are also power users of the DeFi protocols they invest in.

Investors on trial with DeFi can also disseminate comments and feedback on the DeFi protocol to followers with similar interest in the protocol. This is often one of the best ways to build users and community members. Investors who use the DeFi protocol also tend to understand the complex details of the protocol and may profit from the occasional information asymmetry.

In addition, DAO is re-emerging in the DeFi domain, but active stakeholder participation is required to be effective. The apathy & NBSP of a voter in a DAO; (not actively involved in governance)& NBSP; It could lead to problems with plutocracy, which would erode trust in the encrypted network. Therefore, the existence of different investor groups can greatly enhance the credibility of agreement governance.

Therefore, I believe that cryptocurrency investment methods that combine fundamental research with active participation are the greatest source of sustainable returns. We're just beginning to realize the average user and investor & NBSP; (that is, DeFi token holder)& NBSP; The potential for this overlap between groups is enormous.

Reference:

[1] https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/

Original link:https://mp.weixin.qq.com

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