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DeFi on the Rise Again. A Bubble Carnival or A Value Discovery?

2021-02-03 09:07:31

1. Driven by U.S. stocks and giants, DEX has seen an upsurge

The past 2020 was full of turmoil and chaos, and for the blockchain industry, it is also a year full of ups and downs and a year heralding a bright future after painful reflections on the development direction. In 2020, some turned blind to risks and suffered heavy losses, while some broadened their horizons and saw their pockets swell. In any case, the market has been invigorated in the end. The most eye-catching in the bull market is, apart from BTC and ETH, decentralized finance, or DeFi, as you may hear of it more or less.

Not long after January 2021, BTC has entered an adjustment period, and ETH is poised for take-off. Instead of flooding into the stagnating mainstream coins, the hot money in the market has once again rushed into the DeFi sector. At the same time, in the raging GME incident in the US stock market, RobinHood directly forced the sale of retail stocks, which undoubtedly promoted the DEX in DeFi. Many of the world giants have stood by Bitcoin, and even praised DeFi. In this context, UNI, SUSHI and INCH have skyrocketed, and the leader UNI is about to enter the top 10 of CMC.

2. How to look at DeFi? Is it a bubble carnival or a value discovery?

So, for those who cleared UNI airdrops, sold Sushi when it hit bottom, and hesitated to invest in DeFi yet eventually suffered losses from it, how to look at DeFi?

To answer that question, we must be clear about a simple truth: everyone in the market cannot earn money beyond their knowledge. To be specific, if you have more knowledge than others in BTC and ETH, you are more likely to buy tokens at the bottom and earn money. In that case, you profit from your knowledge. On the contrary, how can an uninformed investor benefit from DeFi? So, a bubble or a value discovery, the answer depends on your knowledge about it.

3. What’s the origin of DeFi and where lies its future?

Origin:

Many believe that BTC, which was born in 2009, is the earliest DeFi. BTC was originally designed as a decentralized Internet native asset, a hedge against inflation, and a means of payment, though nowadays BTC is increasingly recognized as digital gold.

Development:

However, for stability and security, BTC only allows limited programming. As a last resort, ETH was split from BTC in 2015, providing new possibilities for the crypto world to move toward decentralized finance through smart contracts.

Evolution:

In 2017, thanks to the infrastructure provided by ETH and the impact of the BTC halving cycle, the crypto world witnessed bubble bursts: all kinds of exaggerated concepts involving e-commerce, SNS, medicine, big data, and artificial intelligence + blockchain kept emerging and falling into decay. Shitcoins could never survive the test of time. Only a few projects represented by Maker, KNC, and ZRX have finally survived and maintained business growth. Why? Because they are the first DeFi projects that keep exploring the stablecoin and DEX along the right track of the crypto world.

In 2018, people felt excited about yield farming before the bear market, but few knew the initial version of Uniswap, which follows the concept of the liquidity pool, had been set up and iterated, a potential hit amid the DeFi boom in the summer of 2020.

In 2019, Havven, which was originally a stablecoin, finally found a new world of synthetic derivatives after struggling on the original track. Possibly inspired by the prosperity of the public chain Staking in 2019, the team modified the economic model, so that users can gain incentives for staking the native token SNX. That was the earliest DeFi yield farming, and also contributed its share to the DeFi boom that summer.

In 2020, the quiet accumulation period was over, and as everything was ready, and it was time for DeFi to emerge and evolve rapidly:

At the beginning of 2020, Ethlend in the segment of lending transformed into AAVE and applied the loan pool concept to reform its business model. It also promoted DyDx's lightning loan function and thus gained market attention.

In April and May 2020, UMA made its debut on Uniswap. It has drawn widespread attention for a sixfold increase in a short period of time. After that, the huge increase in long-tail tokens such as HEX, XIO, ESH, and XOR has brought about the Fomo effect. That was when Uniswap was officially unveiled and achieved a cold start without issuing tokens. Liquidity pools under the X*Y=K algorithm became famous overnight. However, at that time, these long-tail assets were not large in scale and did not have greater influence.

June 2020 witnessed a milestone event that officially brought DeFi to the center of the stage: COMP started loan mining, and users can obtain COMP governance tokens by borrowing on Compound. COMP rose tenfold on Uniswap, and later launched Coinbase, which surprised those victims from the March 12 incident. At the time, few realized that the seeds planted in 2018 or 2019 had finally germinated, and the era of DeFi yield farming had just begun.

In July 2020, YFI helped people automatically switch assets on the AAVE and COMP lending platforms based on interest rates to obtain higher returns. It distributed all tokens fairly through a liquidity pool. Without tokens for investors or those reserved for the team, it has created a new fair distribution model similar to POW, which has brought considerable returns to participants based on innovative products. Many people accustomed to mining, withdrawing, and selling at COMP later felt a pang of regret.

At the same time, the market price of AMPL, in the Rebase concept, soared to hundreds of millions of dollars amid the DeFi boom, claiming to make all investors, both informed and uninformed, rake a lot of money. Many became rich within only one month. 

In August 2020, Curve, Uniswap's improved stablecoin exchange platform, officially issued coins. Driven by its extremely high daily token output and market enthusiasm, Curve has become a hot destination of mining. Stablecoins with an annualized income of nearly 100% can be seen everywhere, which was a miracle for the traditional financial industry. Then YFI cooperated with Curve to create smart mining, a model to capture CRV output. With this innovative function, YFI has sent its price skyrocketing from several thousand dollars to above $40,000, even more expensive than BTC then. Its developer AC has been pushed to the shrine, and the concept of financial aggregator has been deeply rooted in the public. Copycat projects starting with the letter Y emerged one after another.

The reason why AMPL is mentioned here is that, stimulated by the great success of YFI, there was a market trend to distribute tokens fairly by the community. AMPL, which boasts an eye-catching team and investors, also achieved great success last month, but a large part of its tokens was distributed as a result. Therefore, a project called YAM was initiated by the community, aiming to replicate its success by forking AMPL in a fair distribution method by the community. But at present, it seems that YAM’s biggest contribution is to create Pool 1 and Pool 2 for DeFi yield farming. Pool 1 is a staking pool for lossless mining and fair distribution, while Pool 2 needs to mortgage tokens in Pool 1 to provide liquidity for LP Tokens in DEX, which is riskier but more rewarding; however, DeFi undoubtedly comes with huge risks. The Rebase Bug almost ruined YAM. Despite its effort to struggle and develop, such a big mistake was really regrettable at that time.

As YAM fell, another DeFi named Sushi rose. Thanks to the exquisite front-end developed by the Yam team and the contract provided by Comp, ambitious Sushi quickly iterated to replace Uniswap that was in its heyday at that time, continuing YAM’s aspiration to squeeze out AMPL. The story of Sushi seems like a big drama, and it succeeds for two reasons: first, it attracted liquidity providers from Uniswap as the latter did not issue tokens, thus gaining influence; second, after a rally, it vigorously reached cooperation on building the ecosystem and updated its product to gain market share.

In September 2020, Uniswap issued UNI as an urgent response to Sushi, and, as everyone knows, it airdropped 400 UNI to every wallet that has any operation. That symbolized the start of the fiercest competition in DeFi. Following DeFi miners and Three Arrows Capital, retail investors, who once ignored and were confused about and indifferent to DeFi, now all rush to buy Sushi, Pearl, and tokens whose name start with Y. The potential bull has gone, and everyone comes to one side of the boat, making it capsize.

In October 2020, DeFi entered a bear market, and numerous investors suffered 70% or even 80% losses.

However, contrary to the general belief, DeFi did not go down like the model currency in 2019. During the short bear market, there were many interesting and innovative events in segments such as insurance, options, fixed income, algorithmic stablecoins, and leveraged mining. As you know, DeFi soon resumed from the bear market in November, and adjusted itself in fluctuations the next month. After BTC and ETH completed their trends, DeFi has once again embraced a bull market and seen a surge this January, accompanied by the GME incident in the US stock market and the recognition from giants.

How to look at DeFi? 

After reviewing the history of DeFi, we may have such a scene in our mind:

The blockchain world used to be a nihilistic Utopia where a group of geeks and geniuses, who hated traditional finance, invented BTC, hoping to trade (say, a pizza with BTC) and live in this BTC-driven wonderland.

As the world outside is getting chaotic, more and more people have come here. Later, a genius boy was attracted. He brought a more interesting toy, Ethereum.

Indeed, Ethereum is fun, but just when everyone didn’t know how to make better use of it, outsiders flooded in with various purposes and set up their stalls to peddle their gadgets. They claimed Ethereum was capable of this or that, and some even said they had something better than Ethereum. All they wanted was nothing but BTC and ETH.

Overnight, this Utopia was filled with peddling and speculation. After the bubbles burst, the peddlers took away BTC and ETH, leaving a depression here.

It was till then that people realized Ethereum should function in this way. To calm the fluctuations in BTC, they staked ETH in a maker mechanism and created a stablecoin DAI, and then turned to Compound and AAVE to facilitate mortgage lending. People outside the Utopia are interested in Ethereum, and thus bring USDT and USDC for long trade of BTC and short trade of USDT. What’s more, they apply YFI to financial management, and make it possible to automatically switch to the platform with the highest return, Curve to large exchanges of stable assets, Uniswap to speculation and investment, NXM to insuring their assets... In one word, the Utopia has everything they have outside and makes the impossible things outside possible and even better.

To me, it’s an interesting and valuable kingdom. Though with some bubbles, what kind of assets do not have bubbles? The outside world is full of bubbles. After all, even the giants in the outside world recognize DeFi.

(The opinions in this article do not constitute investment advice)

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