Original title: "EP23: Re-examining Defi: The present and future of the most mature track of Web3 business model"

Original source: Mint Ventures

Original audio link

Host:Alex, Research Partner of Mint Ventures

Guest:Mindao, Founder of dForce

Recording time:2024.12.12

Hello everyone, welcome to WEB3 Mint To Be initiated by Mint Ventures. Here, we continue to ask questions and think deeply, clarify facts, explore reality, and find consensus in the WEB3 world. Clarify the logic behind the hot spots, provide insights that penetrate the events themselves, and introduce multiple perspectives.

This episode is the second episode of the "Current Status and Future of Web3 Track" series of podcasts. Let's talk about the present and future of Defi, the most mature track of Web3 business model. In the last episode, we talked about the topic of Crypto AI. In the subsequent series of programs, we will invite corresponding guests to talk about Meme, public chain, Depin, games & social, Payfi, and related topics of web3 policy.

Statement: The content discussed in this podcast does not represent the views of the institutions where the guests are located, and the projects mentioned do not constitute any investment advice.

Alex: Let's talk about Defi in this podcast. We have invited Mr. Mindao, an OG in the DeFi field. He has participated in our podcast before, and he talked about AAVE and stablecoins. First, please let Mr. Mindao say hello to our listeners.

Mindao: Hello everyone, I am very happy to come to Mint Ventures to talk about DeFi again today. It has been a while since the last time we talked. The entire DeFi track has changed a lot. I think I can take this opportunity to give you a summary and share some observations.

Understanding and interpretation of Defi

Alex:Okay, I'm looking forward to it. There are many friends in our program audience who have not officially entered this industry, and there are also many new friends who are interested in Web3. So the first topic we want to talk about is for those friends who have not officially entered this industry. Teacher Mindao actually started practicing in the field of DeFi a few years ago. If you have friends who are not very familiar with encryption or Web3, and they ask you what DeFi is, how would you introduce it in a language that they can understand?

Mindao:In fact, I face this problem every cycle, that is, how to explain Bitcoin, Ethereum, and DeFi. Because Bitcoin has reached a new high at this point in time, many people who have entered the circle will ask me what DeFi is.

I think the good thing about this point is that many people have a concept of Bitcoin. It is a non-sovereign currency, or electronic gold, and a decentralized system. So now these friends ask me, if they know about Bitcoin itself, my simple explanation is: Bitcoin is a currency, we regard it as a decentralized currency, then DeFi is an expanded version of Bitcoin. In addition to currency, all the financial systems that we can access in traditional finance, such as transactions, payments, lending, and banking services, can actually be realized in the expanded DeFi field. You can think of it as an expanded version of Bitcoin, an application version of Bitcoin. This is what I am explaining to my friends now, and they can get a lot of it.

Of course, if you don’t know Bitcoin at all, you may need to introduce it again from the level of decentralization and non-permission, but I think that now basically most people can easily get some of the essence of DeFi itself if they use this analogy.

Alex:Yes, then they often add a question, that is, Bitcoin can be understood, it is an electronic gold, a non-sovereign asset, but most of our current traditional financial services seem to be quite convenient, what is the additional value provided by DeFi? If they ask this question, how do you think you can summarize it?

Mindao:Because I come from traditional finance, I think people who work in traditional finance actually know that the current regulation of traditional finance is completely over-regulated, which is why it is so difficult to open a bank account now. There is a lot of debate in the United States now that many technology companies, especially some entrepreneurs in the cryptocurrency circle, have been so-called debanked (canceled banking services) and have no banking services at all. I think if we really compare it with 10 or 15 years ago, traditional financial services are becoming more and more difficult to use, the threshold is getting higher and higher, and the resistance is getting greater and greater.

So I think the biggest difference between DeFi and traditional finance TradeFi is that I think DeFi is essentially a return to the essence of finance, which is an information network. Our traditional finance completely fragments this information network. Different regulations in various countries, banks’ own supervision, and policy differences have led to the fact that information transmission is completely fragmented, and the resistance is particularly large. DeFi restores it, and finance is information. So whether you are doing transactions, issuing assets, or lending, it is a return to the transmission between information and information, without any obstacles, the so-called non-permission. This is also what I think is the biggest improvement of traditional finance in DeFi. As long as your information can return to a so-called transmission like the speed of light, when there is no obstacle to transmission, the capital efficiency is thousands of times higher than traditional finance.

And we are actually seeing this now, that is, in DeFi applications, if you compare it with traditional finance, for example, lending compared to banks, trading compared to exchanges, the US stock exchanges have holidays and are not open on weekends. Accounts need to be opened between countries, and licenses are required. As an ordinary person, you cannot trade US stocks, domestic stocks, and Russian stocks at the same time. But in DeFi, national boundaries no longer exist. So I actually think that DeFi is to restore finance to an information theory perspective, it is information. So DeFi is to allow information to be transmitted most efficiently, at the speed of light. But in traditional finance, you find that information is not the speed of light, and I even think it cannot even reach the speed of sound, because it has checkpoints everywhere, checkpoints at national borders, checkpoints at regulatory levels, and checkpoints between banks. So in terms of efficiency, in fact, returning to the most fundamental principle, DeFi must be many times higher than traditional finance.

Views on the current status of the DeFi track

Alex:I understand. Let's talk about a deeper topic. In fact, DeFi has developed for more than two cycles to date. The last round of applications that really flourished was the 2020 and 2021 rounds, which we call the first year of DeFi, or DeFi Summer. A large number of new projects emerged, but in fact, very few of them have survived to this day. And from the current number, the number of innovative new projects in this round is far less than that in the previous round. Mr. Mindao, how would you evaluate the current overall status of the DeFi track?

Mindao:In fact, I think the entire DeFi track is also very similar to the innovation in the technology field, especially the financial field. At the beginning, a hundred flowers bloomed and various narratives came out. Because everyone has not yet recognized this narrative itself, during the DeFi Summer, there were really new ways of playing finance every day. But you will find that after sufficient competition, a few tracks will be settled, which we call verified tracks.

Actually, looking back at these two cycles, I think the foundation of DeFi, or primitives, has not surpassed that of 2019. In 2019, we were just the first wave of DeFi. You can imagine that there were Uniswap, MakerDAO, and Compound in 2019. Compound was the first to do pool lending. Aave was also called Etherlend at the time, which was P2P lending. Its approach was wrong. Later, it copied Compound's approach and then rose. So at that time, the entire DeFi primitives were those three: stablecoins, AMM, and lending.

Looking back to now, the foundation of the entire DeFi is still these three, and there are some variants on top, such as some order books, some including concentrated liquidity, and some improvements to AMM. In addition to the current pool lending, there is also this kind of isolated pool lending, but in essence, I think it has not deviated from these three methods. So the current situation of the entire track is that I think there are two particularly interesting changes from the perspective of the two cycles.

One change is that DeFi has been commercialized in large quantities. Every new chain and every Layer2 that comes out has the three major components: stablecoins, lending, and AMM swaps. These three major components are commercialized in large quantities on every chain. Of course, a lot of them are copied from the codes of the existing projects in the market, because they are open source. Uniswap and Aave both use these codes.

But at the same time, another very interesting phenomenon is that while being commercialized in large quantities, the concentration is also increasing. For example, Uniswap's spot trading share and Aave's share in the lending field, these concentrations are going up. So this actually reflects that in the DeFi track, I think the two things of commercialization and increased concentration are happening at the same time. In fact, there are still many new DeFi applications in the past few years. Of course, this is also based on the change in everyone's perception of DeFi. From the traditional so-called DeFi with decentralization as the core, to the current De-CeFi combined applications are particularly numerous.

So I am not saying that there is no innovation. In fact, the track has been highly standardized at the basic primitive level, just the three major items, and these three major items are also very much commercialized, and the concentration is increasing. But at the subdivision level, some new DeFi applications and tracks have also emerged. I think this is a very interesting phenomenon that has emerged as the infrastructure has been built.

Alex:Yes, you just mentioned the three major items: stablecoins, lending, and AMM swaps. And derivatives, in fact, have been making a lot of products since the last round. What do you think of the category of derivatives? Is it suitable for DeFi? Are you optimistic about its subsequent development?

Mindao:This point may be related to another question, that is, what is the underlying logic of the evolution of the entire DeFi track. I have always mentioned a so-called first principle of DeFi in my previous sharing. What is the first principle? First of all, it must be in the place with the greatest resistance, and applications will appear first. For example, in the past, Ethereum Layer1, you can think that its main force of the medium is very large. Even if it is transmitted to Ethereum at the speed of light, because of its gas fee, its throughput is very small, so the DeFi that can occur on the main network of Ethereum is limited, which is the first few we talked about.

For example, why did Aave fail to do P2P lending before, but why did it succeed in the pool model? Because P2P lending, which has high gas and low throughput, can't be used on the main chain at all. Its efficiency is too low, and the efficiency of individual matching is too low. Similarly, why doesn't order book work on the Ethereum mainnet? At that time, dYdX did order book on the mainnet, but later withdrew and went to StarkNet to do it. Now it has an appchain to do it. You find that order book doesn't work on the Ethereum mainnet either, but AMM works. In fact, I think the establishment of all DeFi applications follows a principle: from low-frequency applications, such as lending, such as AMM, its frequency is not that high, and stablecoins are also large-scale low-frequency transactions. Later, when the performance of layer2 or new layer1 is better, you will find that medium-frequency and high-frequency applications begin to appear immediately.

Then why is the perpetual part we just talked about, the so-called perpetual part, now being done by centralized exchanges instead of on the previous Ethereum mainnet? Because centralized exchanges are where the most frequent applications can come out, and perpetual can only be produced in this environment. But what we see is that it is interesting that new high-performance layer1 and high-performance layer2, as well as appchain, are emerging at the same time. We call this perpetual trading, and the scale is very large. For example, in Base, Synthetix Futures, and Arbitrum like GMX, and now the very popular Hyperliquid, which is doing Cosmos SDK like dYdX, you will find that the so-called perpetual applications are actually high-frequency applications, and they must have a high-frequency infrastructure to support them.

That's why we see a lot of perpetuals coming out in this cycle. I think the perpetuals in this cycle may not be able to compete with centralized exchanges like Binance or OKX, because they still have many performance issues. But I think with layer1, including Hyperliquid, you can think of it as an appchain that is very close to the experience of centralized exchanges. With the emergence of this kind of application chain, I think it is entirely possible for perpetuals to compete with centralized exchanges in the future. Of course, you can't make a one-to-one comparison here, and you don't need to. After all, one exists in a DeFi or non-permissioned model, and the other has KYC and other things, which is more like a centralized exchange model. But in terms of performance comparison, I think it may be infinitely close to the experience of centralized exchanges.

Defi's potential space and evolution

Alex:Just now, you actually said that from 2019 to now, the three major components of DeFi or the most market-proven application types have not changed much. So many people say that the basic innovation of DeFi has actually been completed, and they think there may not be too many surprises in the future. In this round, we don't seem to see products as eye-catching as the last round. But some people still think that the potential of DeFi is far from being released. What do you think of this view? If DeFi still has a lot of room for growth in the future, what do you think are its driving factors? How might it evolve?

Mindao:In fact, at the basic level, because the entire DeFi is based on the blockchain architecture, it is block by block, so we see why there is not much innovation at the basic paradigm level. In essence, whether it is the Ethereum mainnet, layer2, or Solana, it still follows the model of one block at a time to build the underlying infrastructure. However, the change in the entire DeFi cycle between this cycle and the previous two cycles is that people's understanding of DeFi has changed a lot. In the past, DeFi was called decentralized finance, but I think that people no longer regard decentralization as a core component.

More importantly, it is permissionless. In this cycle, I have seen relatively innovative ones, such as Pendle and Ethena. Pendle is an agreement for swapping fixed and floating interest rates, a similar agreement to fixed income. Ethena is a typical stablecoin of USDE. In fact, its strategy for stablecoins is what I have been doing since 2014 when we entered the cryptocurrency circle, which is the so-called basis point arbitrage. In terms of the entire trading strategy, the market has been doing it since the emergence of Bitcoin, which is nothing more than how to do basis arbitrage between spot and futures. Ethena turns this thing into a token, and then completely democratizes the so-called in-house strategy that was previously only used by some traders, and then allows the market to capture the so-called basic returns of the fluctuations of Bitcoin or other currencies in this market. If you ask people in the last few cycles, no one would think that Ethena is a DeFi project, because its entire infrastructure is added to centralized exchanges for arbitrage, and although the assets are custodial, this custody itself is not custodial in the contract, but through a custodian. So from the architectural level, it is actually not DeFi. But from its tokenization, from the level that everyone can use its coins to mint it and swap its existing tokens, it is DeFi. So I think everyone can call it an application like De-CeFI or Ce-DeFI. There are many applications like this in this cycle, such as some projects in the Bitcoin ecosystem and some projects in liquid-staking, many of which are similar to this path.

So I think we have actually greatly expanded the definition of the entire DeFi at this time, and then you will find that the TVL contribution of the entire DeFi that has emerged in the past cycle has a large number of projects like liquid staking, such as Ethena, and projects such as RWA on the chain. In fact, for the entire DeFi revival, its entire TVL contribution accounts for a very large proportion. So I think the evolution of DeFi is the evolution of the entire concept, from the purest so-called decentralized finance in the past, to open finance, to now it is actually a hybrid, with centralization and decentralization mixed together. So from this perspective, I think the opportunities for subsequent segmentation may produce many very interesting combinations. Of course, if you are purely from the most primitive, at the fundamentalist DeFi level, there are really not many options.

Because in the past, for example, no one was doing the decentralized stablecoin track, or in other words, there were basically no projects doing the Ponzi stablecoin track like the previous degen. Unlike the DeFi Summer, when there were a lot of decentralized stablecoins with on-chain governance. So I think after the entire definition changed, you will find that many new applications have emerged in the DeFi track, and the TVL has grown very fast.

Limiting factors for the development of DeFi on Solana

Alex:Just now, Mr. Mindao mentioned that the first is that the definition of DeFi has changed. Another value that DeFi really provides has changed from so-called decentralization to permissionless, and then there is convenience, and everyone can reach it. I have always had a question before, that is, the Solana chain, in fact, is very different from Ethereum in that Solana's nodes may be relatively few and more concentrated, and V God has been emphasizing that Ethereum's nodes are decentralized and have stronger anti-censorship. But now we are back to the user experience. Decentralization is not that important. In fact, in terms of accessibility, that is, technical availability, and experience, Solana is actually very good.

But even in this cycle, we found that Solana's DeFi evolution did not resonate very well with the business data of its entire ecosystem. Whether it is the TVL of its DeFi, the stablecoins on the chain, or the TVL of some DeFi projects, they do not seem to have evolved very fast compared to Ethereum's business data. For chains like Solana, their DeFi is relatively slow to evolve. What do you think are the possible reasons or limiting factors?

Mindao:In fact, I think this is because everyone may have a big misunderstanding about DeFi, thinking that as long as a chain is fast enough, funds can be transferred to it immediately. Because we have been doing DeFi since 2019, I think DeFi is the same as all financial companies. The longer it runs, the greater its stickiness. The so-called stickiness of financial companies is actually a security threshold that is constantly increasing. For example, how do you test whether the DeFi of a system is strong enough? For example, the entire DeFi system of Ethereum is now close to 200 billion US dollars in TVL. It is equivalent to saying that there is a bounty of 200 billion US dollars in the ecosystem, that is, funds are on it for various hackers to attack. The TVL here is not out of thin air. It is the case that Ethereum has paid nearly tens of billions of dollars in losses in the past, so such a high moat has appeared.

So why can't Solana migrate this thing over? In fact, the entire trust cost and security cost stickiness are very high. This is why the value of Ethereum lies in that as long as there is enough time to move forward, these TVLs are difficult to migrate. And I think there is another key issue. Because I have used new applications in these ecosystems, I think from the perspective of interactive experience, I don’t think chains like Base or Arbitrum will lose much to Solana. If the gas fee is actually lower than Solana, use it on Base. What is the only downside?

I think it is in the user’s perception. There is no layer 1 or layer 2 on the Solana chain, so there will be no so-called confusion. But there are too many Ethereum chains, including Arbitrum, OP, Base, and Superchain. Conceptually, I think retail investors may be confused when going to the market. Back to the question you just asked, why its TVL and DeFi cannot be migrated there so quickly, I think this network effect, including Solidity as a development language, first has the most complete tools, then has the most audit cases, and has the most components. In this regard, I think it is very difficult to completely copy a chain like Solana. And the most fundamental question is, why does Ethereum go for Layer 2 and what is the advantage of Layer 2 in competing with a single chain like Solana in the future? In fact, I think if more companies want to launch chains in the future, you can't expect that Bank of America or JP Morgan will definitely launch a chain just because they say, "I will build all my financial infrastructure on Solana."

In this case, you will definitely choose a large public chain to support it, for example, it is possible to build a Layer 2 on Ethereum. Under this premise, if you can find more TVL and combinatorial applications, from this point of view, it will be more difficult for Solana to leverage Ethereum's TVL. So you find that the network effects between TVLs are mutually restrained. It is not simply that if the currency of my chain rises, all the applications of my TVL will go over. Including an interesting phenomenon I have seen recently is USDT. USDT is now integrating all the coins of its chains, and migrating a lot of USDT issuance rights of other Layer1s to the Ethereum mainnet.

In fact, it is also based on security considerations. So the so-called DeFi stickiness and security, I think other new Layer2s, no matter how good the experience is, it is difficult to pry this thing over in a short time, not to mention that on Ethereum, as I just said, there are actually many Layer2s that are not worse than these new Layer1s in terms of performance.

Advantages of MOVE language

Alex：I understand. As we see many public chains using MOVE language, even some EVM-compatible Move L2 have come out, and Movement has just been listed on Binance. For MOVE language, their value proposition is that using MOVE language to build DeFi is safer than using Solidity language for various financial services. As a developer and entrepreneur, do you think this advantage of MOVE language is so attractive to developers?

Mindao：We have seen these ecosystems, including Solana team, which we have known for a long time. They all use Rust. In fact, many people may say that Rust language is much better than Solidity in terms of expressiveness and can do many things. Not only MOVE, but many new public chains like Tezos have come up with their own new languages, and they also use various so-called formal verification. But you will find that these new languages disappear very quickly. I think the core problem is that it is difficult to strictly say which language really has a great inherent advantage from the architectural level. I think for a developer, the most critical thing is time, that is, your timing.

The sooner you use it, the more likely it is that all the problems that should be made and the problems that should arise in Solidity have been filled by our developers with real money. In this case, do you say it is more unsafe? At least from our development perspective, I don’t see this issue that way. Because it has enough cases, enough tool support, enough automated auditing things, enough audit companies to cover, and enough hackers. For example, it is very simple. If I issue a bounty, there may be tens of thousands of white hat hackers who can do it within the scope of Solidity, but there may be only a few hundred or a few thousand in the MOVE and Solana ecosystems.

So I think security itself is a variable, there is no such thing as an absolutely safe language. The biggest problem is how new languages can build their own moats in the future. If there is not enough potential energy to start, it will eventually enter a state, just like burning wood, the wood is wet and will never reach the ignition point. In this case, its security itself may not be a certain thing, unlike Solidity, which has enough cases to verify it. So I think there is no so-called absolute advantage or disadvantage in the language itself. On the contrary, I think it is very difficult for a language to be replaced if it reaches a network effect. This is why we have seen that Monad wants to use EVM for compatibility with Solana's high-performance underlying architecture. You can see that there are many new Layer1 infrastructures coming from that route, such as how to make some new and higher-performance public chain infrastructures, such as EVM compatible with this execution environment, or to create a new public chain. There are actually many projects on this route now.

The impact of the political change in the United States on the crypto sector

Alex:I understand that Monad, which you just mentioned, and Movement seem to be in this direction. Then this year, there was actually a big policy change. Starting from November, Trump won the presidency and the Republican Party also won the majority of seats in both the Senate and the House. In particular, the United States seems to have greatly changed its expectations for the development of the crypto industry. Recently, the Fifth Circuit Court of the United States ruled that the previous OFAC sanctions on Tornado Cash were illegal. What do you think of the impact of the current political change in the United States on DeFi and even the entire crypto sector? What are the optimistic parts and what are the pessimistic risk factors?

Mindao:I think from an optimistic perspective, it has exceeded my most optimistic expectations. I didn't expect it to be so cruel. It's a Trump bull market, and Trump's children directly enter the market to do DeFi projects. I think the infiltration of the entire Crypto into the Trump administration started from family members, such as Donald Trump Jr., whose children worked on DeFi projects, and Baron because of another child, who is still studying, is also in the field of Defi NFT. I think it may have a particularly large impact on Trump's core circle. In addition, Vance, not to mention David Sacks, were all infiltrated by people from the PayPal mafia. So you can see that in the circle of characters that Trump can get involved in, basically all of them are Pro Crypto people. So I think at the political level, there is no doubt that it is more optimistic than I expected, and I think it may be too optimistic. This is what I am more worried about, including whether Bitcoin will be included in the US reserves.

From an optimistic perspective, I think there is indeed no ceiling for this cycle. On the contrary, this optimism itself may break the so-called 4-year cycle in the previous currency circle. I think there is a high probability that a regulatory framework will be issued at the legislative level, rather than forcibly incorporating Crypto into the so-called security law system for regulation like the current SEC. I think there may be a completely independent regulatory system. If this happens, I think it may not only be DeFi, but also very optimistic about the development of the entire Web3. From a pessimistic perspective, it is actually obvious now that cryptocurrency itself is no longer a so-called non-partisan political issue. I think it has become a question of party alignment.

This is what I am more worried about. After the entire election, the Republicans and Democrats have formed a front in Crypto and Against Crypto. I think cryptocurrency has now become a divisive issue in bipartisan politics. What if the Republicans cannot get ahead after Trump's 4 years? Will these policies be changed again? This is a topic that is difficult to return to neutrality now. It is a core issue between the Republicans and the Democrats.

Alex:Yes, Trump may not be in office until 4 years, but may be in the mid-term elections in 26 years. Whether the Republicans can get so many seats in the parliament will also be a challenge at that time.

Mindao:Yes, but I think the good thing is that the entire operation this time, not only Trump's coming to power, but also the lobby of the Senate and the House of Representatives, is actually a bit in awe of the entire Crypto Lobby. I don't necessarily mean this in a positive way, but it may be a derogatory word, that is, I think the impact is too great. In particular, the several lobby teams supported by Ripple's organization have a winning rate of 85% in the election of the US Senate. The senators he backs, these Crypto Senators, have a winning rate of 85% out of 100 people, which is a very high winning rate. So this is actually quite scary, which means that in the future all these people against Crypto may not have the opportunity to enter the US legislative agreement. From this point of view, I think it may also trigger some counterattacks from people such as the Democratic Party or Anti Crypto.

Alex:Yes, I see that Fair Shake is already preparing for the 2026 mid-term elections and has raised tens of millions of dollars in advance.

Mindao:Yes, of course this is a good thing, not only from the administrative level, but also from the legislative level.

Conjecture on the process of Bitcoin entering the national finance

Alex:From your current observation, one of the most concerned narratives about this cycle is the process of Bitcoin entering the national finance. Now not only at the national level, but also at the state level, Bitcoin is being prepared. I think Pennsylvania and California, which are relatively fast, have already submitted legislation at the House level. Are you optimistic about whether it can be legislated at the national level in the next four years?

Mindao:I think it may not be so easy to legislate at the US level. If it is at the state level, I think it is easier to do, because the scope of finance that can be controlled at the state level is relatively small. If it is put at the national level, I think it may be difficult. One of them is that I think there is still a very strong faction in the United States. Although Bitcoin is now called electronic gold, many people still regard it as a non-sovereign currency. This positioning itself, I think, is fundamentally to fight against the so-called debasement of legal currency, the so-called devaluation of legal currency. So from the fundamental purpose, it is in conflict with the desire of most Americans to regard the United States as the only international reserve.

In fact, many people in the American political arena hold this view. They think that Bitcoin, although it is called electronic gold, competes with gold, but they think that it will eventually compete with the US dollar. And it is indeed, it competes with all legal currencies, because the debase of legal currencies has room for Bitcoin to grow. So in this regard, I think the resistance is still quite large. Of course, this depends on how much political conviction Trump has to push this forward, it is hard to say. According to his style, he may really push it very hard. But this does not mean that the US president can just push it, it still needs to be passed at the legislative level.

Alex:Yes, I agree with your point of view just now, because in fact, I see that many countries sanctioned by the United States, including Russia and Iran, now use Bitcoin as a potential option for national reserves, and their imaginary enemy is the US dollar, which means that it is better to use Bitcoin as a reserve, which will indeed challenge the status of the US dollar as a basic reserve asset.

Mindao:Yes, so now everyone actually defines Bitcoin as electronic gold, which is actually a very pleasing strategy. Let's say we are competing with gold, first reach a ratio of 13 trillion or 15 trillion, and then compete with gold. Now no one mentions competing with the US dollar, but I think the bottom line is still the same. You want to talk about gold, but you are electronic gold, which can be infinitely divided, so what is the difference between it and currency? There is no difference. But the currency circle is not willing to put this issue on a particularly important level. But I think the US Treasury or the financial circle also sees these very clearly.

Possibility of large companies buying DeFi projects

Alex:Then let's talk about a topic that focuses more on DeFi. Now we have Bitcoin ETFs and Ethereum ETFs. It is no longer a big news for listed companies or even government finances to hold BTC. It is normal for most companies to buy Bitcoin. In your opinion, with the compliance of the crypto industry in the United States, will they consider taking some blue-chip projects of DeFi, such as Aave and Uni, as a merger or acquisition of these traditional financial companies, or at least a potential equity target? Do you think this is likely to happen in the next one to two years?

Mindao:This is also a very interesting topic. We now see that the relationship between Bitcoin ETF and Wall Street or traditional finance is that they only regard it as another trading asset, such as electronic gold. In fact, it is still separated from traditional finance, that is, it is only regarded as part of AUM, part of the asset management scope, and I will give it to users if they want it. But I think there are some interesting changes in this cycle. One is that, apart from the two completely independent entities we just talked about, there is actually no difference between Bitcoin and gold. My company Blackrock also provides different products to my users, and the others are actually not related to Blackrock itself. But Bitcoin and MicroStrategy are more interesting. MicroStrategy is also a traditional company. It is a software company, but now it is a financial company. You can think of it that way, right? But its relationship with Bitcoin is actually the relationship between ETF and Blackrock we talked about earlier. They are completely independent entities. Now Bitcoin and MicroStrategy are twins. Why is it a twin relationship? The key point connecting the two twin brothers is volatility.

The volatility of Bitcoin and the volatility of MicroStrategy's stock are connected. Bitcoin fluctuates, and its stock fluctuates. Its stock volatility will also affect Bitcoin's volatility. So I think this is a particularly interesting phenomenon, that is, Bitcoin and US listed companies actually established such a dual-token mechanism, one of which is Bitcoin, and the other is the stock of the listed company, just like we play this kind of dual tokens in DeFi, the sub-token and the parent coin are linked to each other's economic model.

What is particularly interesting is that Bitcoin and MicroStrategy form a dual-token mechanism to some extent, that is, a connection is established between the stock price volatility of traditional stocks and Bitcoin. So back to the level of DeFi, if Blackrock buys Aave and Uniswap tokens, I don't think this is sexy enough. I predict that in the next three to five years, there will be a twin relationship between DeFi and listed companies similar to the twin relationship between Bitcoin and MicroStrategy. What does it mean? It means that a DeFi protocol controls a listed company. This listed company may be a bank, may do lending, can do banking, it can open up the fiat currency channel to Aave, or a listed exchange can directly call its fiat currency to a DeFi on a chain. This is why I really think that there is a possibility of forming twin coins between DeFi and Wall Street companies. I think this is what is likely to happen in the next cycle. Because now we see that in addition to MicroStrategy, Marathon and many mining machine companies have begun to buy Bitcoin. Using the MicroStrategy strategy actually means that its stock is not only related to the difficulty of Bitcoin's computing power, but also to the price of Bitcoin.

So I think the greater possibility and more interesting point of DeFi in the future is what we call "listed companies first, then DeFi". Your listed company can be another channel for my DeFi to issue bonds, do equity financing, and do things like bank licenses, and then connect these two worlds. I think according to Trump's way of playing, for example, the World Liberty DeFi he is doing now, the next step may be to issue stablecoins, and the next step is whether he will also get a bank license, and whether it is possible to install it in his own listed company. This is completely possible. I really think it may happen in the next three to five years, during the cycle when he takes office. Of course, in addition to him, traditional DeFi projects may also be able to make some attempts in that direction. I think this is more interesting, that is, how to really establish a relationship between "coins" and "stocks" in the economic model in terms of mechanism. Your DeFi makes money, my stock shareholders will benefit, and then the expansion of my stock balance sheet will also help my DeFi to obtain more traditional funds. I think this is a more interesting combination.

Alex:This view is indeed something I have never heard of before, and it feels very novel and imaginative. Previously, there were stock versions of BTC and MicroStrategy, and later there were DeFi versions of listed companies. I think this is really interesting. Let's go back to the views of those large financial institutions on DeFi. Now they may be more like what you said, configuring a Bitcoin channel so that their customers can buy it. They are more of an asset management. Do you think it is likely that they will go out to do DeFi-related financial applications, such as making a better version of Aave, and do such business? For example, like BlackRock or some other financial institutions.

Mindao:In fact, we see that traditional companies like JPMorgan Chase have their own blockchain system. Of course, this is not connected to the public chain. The most used here is foreign exchange settlement. You can think that its entire model is not much different from Curve's model, or in the Uniswap pool, there is not much difference. But this type of application is actually more about inter-bank clearing, and I think this is the first step he may take. Then the next step is how to push it to the public chain and use the public chain's infrastructure. This also goes back to what we said earlier. In fact, I think the entire public chain competition, such as the single chain model of Solana, or the multi-layer model of Ethereum, the most critical point is how these financial companies will access the public chain in the future. If he wants to do it in a controllable way, he must issue a layer2 or layer3 himself, and then connect to the public network. So I think if he wants to enter DeFi in the future, it must be controllable, that is, in a permission chain. I think it may be very similar to the current model of Coinbase and Kraken, but it will be more conservative than them. This is the core of their gameplay, and they are more conservative than them.

Because Coinbase is still a company in the cryptocurrency circle after all. But you will find that Coinbase is actually more conservative than Binance. When Binance was doing BSC, many of its methods were actually more radical than Coinbase. Why is it radical? Because Binance may have some DeFi projects of its own, which may be incubated or done by itself, but Coinbase basically does not really want to incubate such projects. So I think if financial institutions enter the market in the future, they are likely to be similar to Coinbase and Kraken. They will deploy a layer2 and then build some DeFi components. And they are likely to use some open source codes like Uniswap. It's just that they may add their permissions, access, whitelists and other things to their entire logic. I think it is likely to be developed in this way.

Alex: Understand. In fact, whether it is Coinbase or Kraken, they basically all chose OP's stack without exception, and basically entered a large ecosystem of Superchain. I heard what you said earlier, and I think that if such large financial institutions want to build their own chains, they are more likely to choose the Ethereum ecosystem, right?

Mindao:Yes, I think that in fact, for the so-called chain performance you mentioned, for the current performance of Ethereum Layer 2, including the performance after future improvements, I think it can fully meet the needs of these financial institutions. The most critical point is that I think the strategies of Ethereum Layer 2, including the two Layer 2s of OP and Arbitrum, are very different. For example, OP has built a lot of Layer 2 Superchain ecosystems. In the end, it may be necessary to solve how to combine the liquidity between Layer 2s, that is, to have inter-chain communication, so that transactions can be completed in the Layer 2 of different Superchains in one transaction, solving the so-called current Layer 2 split liquidity problem. I think that after this problem is solved, it will bring another network effect, and more people will be willing to join in, and the liquidity network effect will be particularly strong.

Then there is another thing that it may become difficult for other people to leave this network. This is why I am not worried about whether Coinbase will independently develop Layer 1. As long as there are enough chains, and the liquidity and network effects between chains are established, it is not that easy for you to break away from it. If you break away and become an isolated Layer 1, it may not have better value than in the modern Layer 2 architecture.

Impressive projects and evaluation dimensions

Alex:I feel that this is a relatively in-depth view I have heard recently about what the moat of the Ethereum ecosystem is compared to SOL. It is a very novel and insightful view. You just mentioned that in fact, some new products have been seen in this round. So in the past year, which products have left a deep impression on you, whether it is the new development of old projects or the emergence of new projects.

Mindao:I mentioned two new projects before, Pendle and Ethena. In fact, I think the Pendle model is quite tortuous, because at the beginning they came out to make so-called fixed and floating interest rate products, and I saw it at the time. Because I came from traditional finance, I think its particularly bad design is that it has an expiration date. I have always had a particularly big prejudice that I think that making products with expiration dates in DeFi is basically a dead end and will definitely not work. Including many options trading or futures trading options products that have expiration dates, but basically none of them have taken off. So when they came out, I didn't look at the so-called fixed income products with expiration dates. I think this doesn't seem to be very valid in Crypto. But this time, after the LSD and Restaking protocols came out, I think they have indeed found a very niche market. At least at this stage, a large number of these pledge agreements and re-pledge agreements have indeed introduced two groups of gamers. One is the big investors who are interested in fixed income and don't want to bet on the rise and fall of Utoken or the number of points. In addition, it satisfies some retail investors or those who are playing with money, and their so-called speculative needs for U tokens. I think it is a good combination of these two groups. I think in this regard, at least at this stage, they have indeed found the market demand point. So I think there are many DeFi narratives that we may easily deny when we see them.

Of course, I don’t think that the Pendle model is the final model. I think whether it is interest rate swaps or fixed income products, there may still be a perpetual type in the end, such as the separation of fixed income and variable income in perpetual products. It is a bit like a perpetual contract, where everyone can trade all the time, instead of having to roll my position again after expiration. I think it is possible that Pendle is also doing something new. I think this track really seems to have found a very important application of what he calls product market fit in this cycle. In addition, Ethena, I think it has turned a trading strategy that we are accustomed to into something that everyone can use, and now it has grown to a position of 5 billion US dollars. I think it is indeed the tokenization of the entire income market. What they are doing now is the best in terms of token level and the accessibility to retail investors. And now we see that after their product came out, all exchanges are doing it, including Binance, which has launched FDUSD. I also see that the interest rates in the lending markets of OKX and Binance are basically anchored to the basic return of this rate arbitrage. So in fact, exchanges are also learning this strategy. So I think these two products can really find a better foothold in terms of innovation in this cycle. In addition, the on-chain of treasury bonds is actually completely different from the DeFi summer in this cycle.

During the DeFi summer, everyone really relied on subsidies, and there was no so-called real yield. But we see that in this cycle, MakerDAO now relies on the income of the underlying treasury bonds to make a transmission. This point also goes back to what we said earlier. Is this thing actually called DeFi? According to the traditional definition, it is not called DeFi. But in this cycle, what we call the combination of De-CeFi appears. For example, we just talked about Ethena, all of its positions are in centralized exchanges, and all of MakerDAO's treasury bonds are managed by offline trusts, which are also very centralized in theory. But you find that this so-called combination of centralization and semi-centralization actually solves many real income problems, because these are real income, one from the leveraged market, and the other from the income of US treasury bonds, and then through this real income, users can get it through the distribution of DeFi. So I think the evolution of the entire DeFi, we have seen from the pure so-called fundamentalist definition to the current more pragmatic hybrid, which is also a very interesting point in this cycle. Another phenomenon that has emerged in the past year or so is that we used to see that DeFi all had tokens and had to issue tokens. Now we see that Polymarket and Pump.fun have very strong so-called income needs when they don't issue tokens. What trend does this indicate? It's like Polymarket and Pump.fun can't come out without a good infrastructure. Both applications rely on a good infrastructure, Polymarket is based on Polygon, and Pump.fun is based on Solana. So we can see that as the performance of what we call Layer 2 and new strategies gets better and better, there will be a lot of DeFi applications that don't need tokens, or may not need tokens at all, but at the same time provide enough use value. This is particularly obvious to us now.

Back to what I just said, I said that the first principle of DeFi is that as the performance gets better and better, some applications that need to rely on this high-performance chain will emerge, such as the Polymarket and Pump.fun we just said are typical applications of this type. I think there may be a lot of this in the future. Including the fact that we now see many Trading Bots that don't have tokens, but Trading Bots are particularly profitable. Like Pump.fun, it can earn 1 million or 2 million US dollars a week. I think this is very different from the previous two cycles we talked about. In the previous two cycles, it was basically difficult to start a project without tokens. But now we see a large number of such applications that actually do not need tokens at all and have found market demand.

Alex：As an investor, when you invest in a DeFi project, which dimensions will you focus on, or what do you think are the moats of typical DeFi projects?

Mindao：I think it depends on the length of the investment cycle. If you only look at the cycle of one or two years, it may be narrative driven, that is, narrative driven will be more, such as investing in some popular DeFi projects with some mechanisms. But from my perspective, I look more at longer cycles, that is, cross-cycles. If we look at it from a long-term perspective, we need to be able to survive several cycles of projects. In the past, I thought the community was very important, and it seemed that a particularly strong community drive was required, but now I find that the community may not be the most critical for DeFi projects. Because we now see that the DeFi projects with the highest valuations and the highest moats may not have much to do with the community. For example, Uniswap now has a market value of tens of billions of US dollars. Uniswap has a large number of users, but it is difficult to say that it has a community. AAVE is different. AAVE has a certain community, and you can see the discussion in the forum. But I think Uniswap, including AAVE and Maker, has two major moats. One is of course continuous innovation, and each time it is an innovation that goes further than the cycle.

Another key point is that their brand is very powerful. Now anyone can fork Uniswap, V1 V2 V3, and fork it. I think that 60% to 70% of Uniswap's current market value is brought by its brand. And this is something that other forks will not leave. I think these projects have basically achieved it. Of course, in DeFi, if you want to have a brand, it still depends on two things. One is the continuous innovation I just mentioned. But you don't necessarily have to be the first to innovate. For example, AAVE is not the first to innovate, but it has been doing it continuously from 2019 to now, while Compound has stopped doing it. The founder of Compound has now left to work on other projects. After the real DAO, Compound has very little innovation now, but AAVE is actually still innovating in every cycle. Another one is DeFi. I think the core is security. Uniswap has never had a security incident. Compound, Maker and AAVE have all had security incidents, but at least these security incidents did not stop them from getting up.

So I think when these two points are achieved, its brand value will continue to strengthen with each cycle. I think this is its biggest moat. It is difficult for you to see other projects below, and you can see that the projects with increasing concentration are all projects with very high brand awareness.

Principles of Defi Project Configuration

Alex:In terms of specific secondary asset configuration, in addition to BTC and Ethereum, what we call some blue-chip options, will projects such as DeFi, especially some leading projects, be included in your investment configuration list? Let's talk about the long cycle.

Mindao:I basically won't allocate. The fundamental reason why I don't allocate is that we are already doing DeFi, and we have invested time and energy in this set up. So this may be a big difference between me and other investors, that is, we don't need to double this thing, and we will allocate more to the public chain.

Alex:I understand. If an ordinary Web3 investor has BTC, Ethereum, and some public chain tokens in his portfolio, do you think projects such as DeFi should become part of the investment of most ordinary investors?

Mindao:Actually, I have shared before that I think the most important thing in investment is the investment portfolio. For example, when I entered the cryptocurrency circle in 2013, I said at that time that in addition to Bitcoin, 30% of my investment portfolio was invested in some random projects, which must be non-Bitcoin projects. I invested a lot at that time. In 2014, I invested in Ethereum's ICO, and I bet on Ethereum. In addition to Ethereum's ICO, there were many other ICOs, about three or four at that time. At that time, there were very few ICOs, especially in 2013 and 2014. There might be a few ICOs a year, and I basically invested in every one of them, of course, the allocation ratio was different. I think if you are a retail investor, the construction of the investment portfolio is the most critical, and you can't all be in Bitcoin and Ethereum.

Of course, I am talking about really relying on this coin to turn things around, not to double it. If you want to turn things around, I think the first thing you can't do is all in mainstream coins. For example, some radical people are 100% all in altcoins. I know that there are people around me who have lost 100%. If his ability to make money is strong enough, he can allocate funds and does not care about losses, then I think this strategy is not wrong. Just 100% all in, even into meme coins and degen coins, I think there is no problem.

If you are building an investment, I think at least 30% may be invested in so-called alternatives, that is, in addition to mainstream coins. DeFi is definitely a track worth configuring. In addition to DeFi, I don’t know what other types of applications in Crypto have real value capture. Now all the so-called real yield and real income are DeFi applications. So in this regard, I think if you really don’t consider mainstream coins, and only consider altcoins, DeFi must account for a large proportion, I think at least 50%. Then the remaining 50% may be supplemented with some Degen coins, memes or other types of tracks.

Alex：Okay, thank you very much to Mr. Mindao for sharing with us today. We welcome Mr. Mindao to share more of his insights and opinions on DeFi and Crypto. Thank you for your time.

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