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NewBloc: Review the benefits of DeFi unsecured loans from AAVE

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AAVE may be the leader in DeFi in the future.

Original title: "NewBloc: Reviewing the Benefits of DeFi Unsecured Loans from AAVE"

Original source: New Bloc Strategy Analyst Barry

The author of this article is Barry, a strategy analyst at New Bloc, with 5 years of trading experience in the foreign exchange gold market.

On January 19, ETH hit a record of $1440 At the same time, DeFi projects on the Ethereum chain have also been favored by the market. Since May 2020, the topics surrounding DeFi have been increasing. In less than a year, the total lock-up value of assets in DeFi has increased by 25 times, and its popularity is amazing.

We believe that DeFi continues to receive attention from the market due to the following reasons:

1. Landing application: DeFi was established to solve the traditional Born out of the disadvantages of finance, it transfers intermediary trust to machines, thereby reducing the cost of financial lending and breaking the monopoly of credit institutions and central banks;

;

2. Low threshold and high interest rate: The participation threshold of most DeFi projects is low, and because sometimes the lender and the borrower have less demand, there will be relatively high interest rates. High interest rates to attract investors to deposit coins to one of them, and eventually become LP;

3. Low cost of DeFi: Although from a short-term perspective, the cost of purchasing a vending machine is much higher than the labor cost of hiring employees, but from a long-term perspective, this one Undoubtedly, the consumption of labor costs will gradually decrease, while the efficiency of the machine will remain high.

If we regard digital currency as a transaction medium, according to historical deduction , it can be concluded that finance is the accelerator of the economy. The use of leverage will help the economy to have an amplification effect, but at the same time, it will also accelerate the decline of the economy in an economic depression.

If the cryptocurrency market is only obtained through mining , when the price of tokens rises, the price of mining machines will also rise, which will eventually lead to an increase in the computing power of the entire network and an increase in the difficulty of mining. For Bitcoin, which is anti-inflation, this kind of production reduction every 4 years will make miners feel that their The cost is self-evident. When the price of tokens falls, the mining risk of miners will increase day by day.

With the development of digital currency today, its scale is already large enough, As far as the market is concerned, the liquidity and market acceptance of Bitcoin and altcoins are very different. The financing demand between tokens is increasing day by day, and DeFi, as the financial system of the cryptocurrency market, will naturally have a blowout demand growth.

Taking a simple metaphor as an example, with the integration of the global economy Today, each country and region has played its own comparative advantages to conduct transactions. For example, Australia can be simply regarded as a raw material country, China as a big consumer country, Europe and the United States as a research and development country, and different currencies have different economic structures behind them. .

The allocation of special drawing rights can provide liquidity and supplement During the financial crisis, IMF distributions to member countries totaled $182.6 billion in 2019, with special drawing rights as an example. Its value lies in linking countries with different divisions of labor, providing them with liquidity, maintaining the stability of their currency values, and reducing the risks brought by large fluctuations in currency values to the economy. For the cryptocurrency market, DeFi will take on a similar mission, and its significance is to stabilize the risk of large fluctuations between different tokens.

AAVE

For the financial market, liquidity can be regarded as an important reference indicator for stability, and the current Aave liquidity pool has a fund size of more than 3.3 billion US dollars. It is said that AAVE has certain advantages in DeFi, but the current DeFi projects are basically biased towards mortgage loans. When the market size is small, mortgage loans can indeed avoid a lot of risks, so that the project can continue to be large-scale, but today The DeFi market in China already has a certain scale. In terms of market share, it seems that continuing the mortgage loan model will miss more market share.

From the perspective of the game, when the market size is large enough Unsecured loans will greatly improve capital efficiency when covering credit risk.

For borrowers, mortgage credit is not created out of thin air, but is based on OpenLaw to ensure that credit-based loans are repaid, and each credit delegation creates a smart contract-based credit delegation vault, which is a debt wrapper built on top of Aave.

The vault allows users to set different delegation parameters, including that borrowers can Which currency to withdraw, the interest rate formula, and most importantly, the credit limit. With OpenLaw, all of these parameters are selected through a programmable legal agreement set up by Karen and Chad, leaving Chad free to simply withdraw funds.

There are two sources of funds for credit entrustment, one is the The trust between the two, and the other is the trust of the smart contract.

AVE’s economic model:

1. Issuance of new tokens and replacement of old tokens

2. Start a security module SM

< p align="left" line="faww">3. Introduce security and ecological incentives to drive the development of the protocol

4. Release a Governance framework with decision rights

5. Governance defines a set of policies for the Aave protocol and the capital market to follow

6. Introduced Aave Improvement Proposals (AIPs) for future protocol upgrades

AAVE Reward mechanism

In Aave, both reward mechanisms are One is the security incentive mechanism and the ecological incentive mechanism. There are three ways to mine AAVE:

1. Pledge AAVE to the security pool

2 , Borrowing on the AAVE platform

3, providing AAVE/ETH liquidity market making on Balancer

1. Pledge AAVE to the security pool

AAVE's security module SM, its operating mechanism is to use pledged funds as a guarantee to solve the problem of insolvency that may arise during the loan process. The pledged funds are AAVE, and users can pledge AAVE to the SM pool Get AAVE token rewards and protocol usage fee percentage.

2. Provide AAVE/ETH liquidity market making on Balancer

Put AAVE/ETH tokens into the Balancer platform to participate in liquidity market-making, obtain BAL and trade The handling fee is divided into.

3. Borrowing on the AAVE platform

Borrowing on the AAVE platform will be rewarded by the ecological incentive pool.

Follow-up

With the development of the cryptocurrency market becoming more and more complete, the demand for integration between tokens is also increasing, and AAVE, which dares to innovate in DeFi, is naturally received favored by the market. For investors, it is important to control risks, but given that the current market is still an incremental market, it is necessary to take the lead in seizing shares before the market matures.

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According to market statistics, AAVE has increased by 623.32% in the past three months, far exceeding For mainstream currencies such as BTC and ETH, the market value ranking of encrypted assets has rushed to the 15th place in the world, and its market recognition is obvious. As the DeFi ecosystem gradually improves, the advantages of using innovative models to seize market share will gradually emerge. AAVE may become the leader in DeFi in the future.