HashKey: Discussing the Innovation and Opportunities of DeFi Trading, Lending and Derivatives
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), published with permission.
Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, published with permission.
Written by: Zheng Jialiang, Research Director of Blockchain Investment Fund HashKey Capital
After more than two years of development, the decentralized finance (DeFi) industry has gradually demonstrated a strong ecology. Although this ecology is based on Ethereum, the ecology of DeFi is not exactly equal to Ethereum. We thought last year that DeFi would move closer to traditional finance and draw on many standard designs. But relying on the characteristics of "decentralization and no review", DeFi has developed a different appearance.
The brief views summarized in this article on the DeFi track are as follows:
DeFi's AMM is a new way that can make up for the shortcomings of centralized exchanges (CEX), and has great potential for development. Trading is still the number one demand in the blockchain world in the past, now and in the future;
The increase in demand for loans comes from liquidity mining and nested leverage, which plays a role in amplifying earnings;
Decentralized derivatives are more complicated, and there is no mature platform in decentralized exchanges, and derivatives combined with contracts and synthetic products will develop;
There are still very few participants in decentralized insurance, the industry's "demand is very rigid", and the track pull effect is obvious. If you control the risk investment, the return will be great.
We also briefly did a quantitative analysis, studied the income characteristics of DeFi tokens, and found several interesting phenomena:
According to the current data, the price return of DeFi tokens has little to do with short-term mining returns (it is a bit counter-intuitive and will be explained later);
Surprisingly, the income of DeFi tokens has little relationship with ETH;
There are two types that have the greatest relationship with the income of DeFi tokens, one is Bitcoin, which has obvious negative correlation characteristics, and the other is that it shows the same direction as the non-DeFi altcoins with small market capitalization, indicating that DeFi has more characteristics of altcoins;
Our statistics show that there are still about 33% of the changes that cannot be explained, which may be attributed to factors such as valuation, fair launch and long-term mining income, and project fundamentals.
Our judgment on the prospect of this liquidity mining is as follows:
Liquidity mining is a good way to make use of profit-seeking onboarding users, just like Uber, Didi and the early subsidies of Internet products;
It embodies a certain degree of fairness, allowing the community to make full positive contributions and earn more for more work;
There is a greater risk in launching a community project hastily. The actual value of project tokens has not been tested, and the economic models of many projects have not been straightened out. Tokens only have governance functions, and it is difficult to capture value, which is covered by FOMO;
The later the project is, the more difficult it is to go online, and the taste of the community is getting higher and higher, and there will be "overwhelming" situations. Refer to the later stage of IEO (this is already the case now);
There will definitely be some truly valuable products and economic models left behind, but not most;
On the contrary, the fee congestion of Ethereum is "set off by other public chains", and the competition of the next generation of public chains increases uncertainty.
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Transaction: The AMM mechanism organically solves the problems of currency listing, cold start, slippage and liquidity
In the past, the idea of DEX was to directly move the order book model of CEX to the chain. Although it can realize the self-managed assets of the blockchain and no KYC/AML and other characteristics, it ignores three problems:
Compared with CEX, this mechanism has no advantage, because the speed of the order book cannot catch up with the centralized order trading center, and there is no way to find the price in time;
With the current architecture of Ethereum, the transaction speed is also extremely slow;
Creating an order also requires paying a gas fee (it will not be returned if it is not completed). So basically DEX can only appear as the copycat of CEX.
AMM, liquidity mining and project launch mechanism are closely integrated
However, the advantage of DEX is actually the quick access to open market liquidity, and if you want to list on CEX, you need to go through a long process and a lot of overhead (at least in the past). It can be said that the CEX model determines that it is impossible for the project party to operate in a decentralized small team or community mode. It is very difficult to complete a complete set of financing, development, currency listing, and market-making processes without a team to do a cold start.
DEX can just correspond to the community’s currency issuance model (now it is slowly standardized). The token of a DeFi project does not have a strong team to operate. It is difficult to get through CEX, but it can quickly realize trading pairs on DEX. There is no way for CEX.
In addition, the cold start of the DEX order book model is very complicated, requiring the market-making team to understand not only market making, but also blockchain, smart contracts, and wallet interaction. However, AMM solves this cold start problem. It only needs to provide LP token, and ordinary people can participate in market making, which greatly reduces the threshold. With the addition of an incentive layer (liquidity mining), a series of problems such as currency listing, cold start, and transaction slippage can be solved at once (at least partially), and unexpected results have been obtained.
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Of course, there are many problems with AMM. Here we compare the common AMM and order book mode here:
The biggest problem of AMM is impermanent loss, because AMM does not take the initiative to provide orders, but only provides a pool. The centralized order book has makers and takers to provide liquidity based on a certain market price, and spontaneously do what the oracle machine does. The centralized exchange is essentially an order book sorting and matching pool, and the price is determined by the order book. Sponsors decide for themselves.
For AMM, such as the popular constant product market maker CPMM, the price is determined by the number of tokens, that is, the constant product of X*Y determines that ∆X can be exchanged for ∆Y, and after the transaction is exchanged, you will know that the corresponding token price is how much. Therefore, the price estimate provided by AMM before the transaction is converted based on the ratio of ∆X and ∆Y.
Therefore, the real price discovery of AMM must be seen only after the transaction, rather than spontaneously forming market prices through makers and takers like centralized order books. So arbitrageurs take advantage of this to make a profit, thus causing impermanent losses. However, some AMMs have begun to introduce the oracle mechanism to provide prices, but the quotation frequency of the oracle mechanism needs to match the transaction frequency. The price cannot be adjusted automatically like an order.
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Borrowing: Provides liquidity, leverage mechanism and income amplifier
Lending is the earliest DeFi, represented by MakerDao. Later, Compound, Aave, bZx, etc. were launched. Compound's liquidity mining ignited the entire community and became a pioneer in the DeFi industry.
The minimum amount of borrowing is actually related to transactions and liquidity mining:
The lending platform itself can carry out mining, such as Compound, bZx, etc.;
If it is possible to carry out credit loans such as Aave, the increase in leverage is even greater.
However, there is a premise for the above minimum amount, which is the end point of the entire mining game - the "yield rate" of liquidity mining should be relatively stable. The current industry is constantly extending the game forward (continuing life). Although I don’t know where it can be extended, including centralized exchanges that have begun to carry the banner, it is already a little difficult.
However, through liquid mining, the product capabilities of the lending agreement have been activated: increasing currency types, increasing lending functions (credit), liquid mining for user subsidies, obtaining a group of real users, conducting user education and retaining available products.
There are also some lending protocols that try to introduce a centralized method, that is, use real identity information (such as banks, telecommunications), etc. for credit lending, such as Teller. This can also be seen as the transformation of traditional centralized lending products into digital currencies.
Insurance: great potential but relatively rough products
Decentralized insurance is the most innovative mechanism of DeFi. Compared with other types, it is still in the early stage and has greater opportunities. We discussed the topic of insurance mechanisms in our previous report. In traditional insurance, the form of joint-stock insurance company is the mainstream (50%-70%), and mutual aid and mutual insurance are secondary forms, but the proportion is not low, accounting for about 27% of the global market. In the United States China and Europe are particularly developed, both exceeding 30%, Japan exceeding 40%, and China's proportion is very small.
The advantage of mutual insurance companies compared with joint-stock insurance companies is that joint-stock insurance companies involve the interests of three parties, namely managers, policy holders and shareholders. In a sense, policy holders and shareholders have opposite interests, that is, more compensation If the policyholder pays 1 yuan, the shareholder's interest will be reduced by 1 yuan. However, it can be alleviated through the "checks and balances mechanism": that is, if the insurance company has a clear preference for shareholders, the number of insureds will be greatly reduced, which will affect long-term interests.
In mutual insurance, there are only two parties: the manager and the policyholder. The policyholder puts it into a pool, and all compensation comes from this pool, without involving shareholders, which is greatly simplified. Therefore, the nature of mutual insurance and blockchain is similar in some cases, such as blockchain project owners are only divided into teams and general token holders.
Centralized insurance can effectively utilize the mutual insurance model
Nexus Mutual also hopes to promote insurance products to a wider real world. For example, the amount insured is not linked to the actual loss. For example, compensation can be partially processed instead of simply yes/no. All this requires more efforts in the direction of products and pricing, which is very challenging. The team has "deep insurance and actuarial experience", so there is still great hope for the intensive cultivation of products.
Of course, another idea is to use financial products such as options to provide certain guarantees, but this is more like a type of derivatives than insurance.
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Derivatives: The synthetic product track has many advantages
Synthetic products have advantages over traditional finance
We think DeFi derivatives can differentiate from CeFi is the synthetic product series. Synthetic products are a special type of product (of course they will be considered as derivative products), but synthetic products have been realized in traditional finance, and a large number of transactions have been carried out through CFD (spread platform) in the open market, and in the non-public market through investment banks. There have been a lot of customization services, and it is not a new thing.
The risk of traditional CFD platforms is mainly counterparty risk. In fact, the corresponding assets cannot be held through the CFD platform, and the CFD platform does hedging in the middle, resulting in the actual counterparty between the user and the platform.If it is done with DeFi, the counterparty risk is actually reduced. This is determined by DeFi and blockchain mechanisms. Take Synthetix as an example, because all products are completed based on user mortgage platform native tokens, to make the risks of synthetic assets controllable, an over-collateralization (750%) is required, and synthetic asset miners will get the transaction fee of the asset and require Only by maintaining the mortgage ratio can you claim the fee share, and more synthetic products and transactions are the elements of the platform's success, so the platform's incentive to do evil is reduced. In addition, the current CFD platform still needs a set of traditional KYC procedures, and the participation process of the DeFi synthetic asset platform is smoother.secondary title
The profit margin of the perpetual contract is the largest, and a new design and structure are needed
Decentralized perpetual contract products
. In fact, those who do perpetual contracts are seeing that in CEX, the development speed of contract transactions is very fast, which has already surpassed spot transactions. There was a problem with the BitMEX server downtime on March 12, and some DeFi only contract liquidation problems occurred. The DEX of the perpetual contract has not yet accepted this kind of test. So based on the current Ethereum architecture, the performance may not be good enough.
It is also very interesting to see that DEXs of other high-performance public chains are also slowly participating. Products on Cosmos, Polkadot, and Solana are very powerful competitors. It will also stimulate the cross-chain transaction track.
Derivatives are definitely the most profitable part of CEX. CEX will not relax its pursuit of products, market share, and mechanism design. Derivatives of DEX are equivalent to encountering the most difficult competitor. But it may be possible to design a "similar" liquidity mining mechanism, which requires more whimsy and opportunities, otherwise it may move towards a similar pattern in which DEX with thin orders competes with spot exchange CEX.
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Analysis of the income characteristics of DeFi tokens
Let’s do a very preliminary analysis here, trying to find out what factors come from the fluctuations in the price income of DeFi tokens. Here we adopt the method used by Zayn Khamisa in the article "An analysis of the factors driving performance in the cryptocurrency market".
Here, no single token is selected as the dependent variable DeFi token to prevent the large fluctuation of a single token from being too affected. We choose the DeFi index on the exchange FTX as the dependent variable, which contains 11 DeFi tokens. (DeFi Pulse also launched a similar DeFi index, but with too few data points)
We select several types of independent variables: one is DeFi mining yield, the second is BTC price, the third is ETH price, the fourth is the large altcoin index Alt, the fifth is the medium-sized altcoin index Mid, and the sixth is the small altcoin index Small. (Fourth, fifth, and sixth are also taken from FTX, and there are 5 component coins in the middle of the six that overlap with the DeFi index and have been eliminated).
Both the independent variable and the dependent variable are selected from the daily rate of return (the daily rate of change), which has been stabilized, so the OLS regression method can be used, following the practice in Zayn Khamisa's article. Here are the simulation results:
We found that only BTC and the small altcoin index have explanatory power (P-Value is significant), and BTC is negative, the rate of return model can be simplified as follows:
Our understanding of this yield model is as follows:
The returns of BTC and DeFi are negatively correlated. It can be seen from the phenomenon that when the altcoins are dancing, the BTC market is slightly flat;
The change or rise of BTC will generally cause the so-called blood sucking of DeFi tokens. It may also be from the risk aversion/profit demand, that is, the risk aversion/profit order of DeFi rushes to BTC;
The returns of DeFi coins are very similar to those of small altcoins, so they can be classified as high-risk altcoins at present;
What's interesting is that DeFi tokens have little relationship with Ether, neither positive nor negative. If we only start from the model, DeFi tokens have little relationship with the Ethereum ecology. However, the design of Ethereum does have a certain deviation from the prosperous relationship of the above applications (that is, the value capture ability is weak), and there are many types of tokens that can be used for liquidity mining, not limited to Ether;
Summary and Outlook
It is also possible to add more independent variables, such as other external factors. However, due to the "niche" nature of DeFi tokens, we think it is of little significance to choose other categories such as VIX, oil, and gold that Zayn Khamisa chose in the article. Factors can be further stripped from Alpha if the other independent variables are more specific.
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