If DeFi will swallow conventional finance within the next ten years, how should we spend money on DeFi?
When DeFi grows in to one of the more active areas of the blockchain, we have to comprehend the DeFi investment philosophy and participation techniques.
Published by: Arthur Cheong, DeFi & Cryptocurrency Investor
Compilation: Johnny
Regarding DeFi investment theory, my summary is really as follows:
"In yesteryear ten years, pc software has swallowed the entire world; within the next decade, DeFi will swallow conventional finance. "
Why DeFi will swallow conventional finance? Considering that the beginning of the industrial age, the worldwide financial structure has remained ostensibly unchanged, relying heavily on financial intermediaries. Although pc software technology has made significant progress, a large the main existing financial infrastructure remains outdated and overrun. Although many financial technology products have emerged in the past a decade to fill this gap, they all need to be integral with the prevailing economic climate to work. For example , the most used e-wallet provider on the planet needs to connect to a current banking account to be able to withdraw cash and recharge.
Source: Liberty Games
However , today, with the advent of DeFi predicated on permissionless smart contract blockchains, all these are undergoing revolutionary changes.
The benefits of DeFi will spread through the duration of developed and emerging markets. In developed markets, DeFi will provide consumers with more choices, reduce steadily the cost of the original economic climate, and bring greater liquidity and product innovation to the financial market. For emerging markets, with the rise of stablecoins, DeFi will provide a safer means of storing value and supply financial services for huge amounts of adults who can't make use of the existing economic climate.
In the end, DeFi replaced the "credit layer" of finance with pc software and codes, that is, financial intermediaries such as banks, asset management organizations, and insurance firms.
By eliminating financial intermediaries and related costs, DeFi brings the promise of wider access to financial products, programmable currencies, real-time risk transfer, and auditability of financial contracts. This represents a brand new stage in the development of financial services, that is characterized by transparency and openness, that will promote more financial inclusion.
The financial sector is the largest product/market ideal for permissionless blockchains. For all those concerned about this sector, it is clear that DeFi is the biggest success case in the crypto sector since 2019. DeFi has grown in to one of the more active areas of blockchain: DeFi has experienced rapid growth through every measurable indicator, such as the total value locked in DeFi, user growth, and transaction volume. From stable coins, decentralized exchanges, lending platforms, payment networks to synthetic assets and asset management, the DeFi ecosystem is booming.
The success of DeFi is not achieved overnight. Since Satoshi Nakamoto created Bitcoin 11 years back, the foundation of DeFi has been laid. However , due to the limited programmability of Bitcoin, it is difficult to build a financial protocol on its basis. With the advent of Ethereum, this became possible. Ethereum is a permissionless blockchain with a complete smart contract function which more technical financial applications could be built. As early as 2014, the Ethereum white paper mentioned financial derivatives and stable coins.
Through the years, there has been countless attempts to make use of permissionless blockchains in other use cases, but with the exception of DeFi, these attempts have already been unsuccessful, such as the a lot more than 100 projects listed on ICObench, including media, entertainment, as well as tourism And so forth in a variety of categories, even though the initial ICO boom has allowed countless such attempts to obtain funding. In addition , even the integration of permissionless blockchain to the supply chain system is difficult to obtain support, no matter exactly how many large organizations it has support.
It's no coincidence that only DeFi projects are thriving among projects that are trying to build on permissionless blockchains. Permissionless blockchain is a distributed database optimized for decentralization and openness, while sacrificing certain performance-this is a high price: Weighed against the utilization of cloud infrastructure such as AWS, Ethereum could be the speed of storing data is orders of magnitude slower and much more costly.
However , finance has always been built on trust, and trust has always been built on intermediaries such as banks, exchanges, insurance firms, asset management organizations and custodians. Considering that the industrial revolution, the structure of the entire industry has remained unchanged before emergence of financial technology in the past decade. Although many fintech start-ups have further improved financial efficiency, they are still not generally available and often operate within the boundaries of an individual nation state.
Weighed against other use cases, even if there is a trade-off between computing and storing data, it is worthwhile to employ a permissionless blockchain to carry out financial changes, because financial providers are always at the trust layer (not the price layer) To compete. By transforming the trust layer from a financial intermediary to pc software and code on the blockchain, DeFi provides universal access to financial services. This represents a paradigm shift in which a user experience with reduced trust can be done. Such an era, controlling users' data and digital activities can be a burden, and DeFi should be able to provide better products than conventional finance.
A good example is the rise of stablecoins, which solve the greatest obstacle that prevents the widespread usage of cryptocurrencies as a medium of exchange due to the volatility of cryptocurrencies. The total market value of stablecoins has increased 5 times in the past couple of years, and the sum total supply is close to US$10 billion. The total value of stablecoin chain transactions on Ethereum also exceeds the ETH asset itself.
Source: Nic Carter & Coin Metrics
Stablecoins also fill the gap popular for USD that can't be met through conventional channels. With regards to supply, USDT, the biggest stablecoin by market capitalization, is specially popular away from United States. The total way to obtain stablecoins will continue steadily to grow rapidly for a while.
DeFi's interoperability and composability further accelerate the growth of stablecoins, because different financial primitives could be built on top of each other to provide similar products that are superior to centralized ones.
For example , whether it is a lending platform like Aave or an automated market maker liquidity pool like Uniswap or Curve Finance, stablecoins take into account the majority of the value locked in a variety of DeFi agreements. This allows users to obtain income through stablecoins, that is increasingly difficult to attain in the post-COVID-19 zero interest environment.
In under 36 months, the sum total value of locked assets (TVL) of DeFi applications has exceeded US$800 million, with a peak value of US$1. 2 billion. As more users touch DeFi and gradually accept it, this field might develop further.
Most of the above factors indicate that DeFi is a major product/market ideal for permissionless blockchain driven by smart contracts, and will continue to be so in the future.
DeFi's investment philosophy All successful investors have a guiding philosophy to guide them to create investment decisions. In terms of DeFi can be involved, it is more important to have an investment philosophy that can help us enter this rapidly changing DeFi field. My investment philosophy could be summarized the following:
Fundamental-centered investment, along with active participation, will produce the most sustainable reunite.
Most cryptocurrencies are mispriced, but fundamental factors are gradually becoming important in expense discovery.
In the original financial sector, the degree of information asymmetry in the wild market is gloomier and the scope of access is wider, resulting in fairer price discovery and liquidity premiums. However , this case in the original market could be completely opposite to the nascent industry of DeFi.
The open market of cryptocurrency is dominated by non-professional investors, coupled with the lack of widely accepted valuation techniques, which ultimately shows that most cryptocurrency open market investors usually do not adopt strict techniques when coming up with investment decisions. Under normal circumstances, prices are dependant on speculative enthusiasm and memes, and major news and exchange listings frequently promote numerous directional movements.
Given the nature of the public cryptocurrency market, the pricing of numerous cryptocurrencies listed on exchanges could be more unreasonable than the pricing of private markets dominated by professional investors. This is also true for cryptocurrencies that are listed on exchanges and also have an industry capitalization of less than $500 million.
The possible lack of liquidity of these low market capitalization cryptocurrencies makes them unattractive to established cryptocurrency hedge funds, because most hedge funds have to maintain a liquid asset portfolio to manage potential investor redemptions. However, cryptocurrency risk funds (venture funds) tend to ignore these low market capitalization cryptocurrencies because these funds concentrate on the main market and stocks, where they will have stronger perceived advantages.
For some investors, cryptocurrencies with undervalued valuations are ideal investment targets since they provide a three-fold rise probability and a small fall potential (when investing in DeFi, active participation is important There's also different spectrums between cryptocurrencies. Even more mature crypto networks (such as Bitcoin and Ethereum) are closer to commodities in nature, and most DeFi protocols are more similar to early in the day equity, even though they might be publicly traded. of.
These young DeFi agreements require active support, including providing liquidity, product feedback, playing governance, along with other community inputs to reach your goals. But for some DeFi protocols, such support and collaboration may well not exist or be lacking. Active investors can fill this gap by providing value in a variety of ways.
For almost any DeFi agreement, the most defensive moat is the liquidity and balance sheet that its platform can attract. Good liquidity is important for decentralized exchanges (DEX), because for users, price is the biggest differentiator. Lending agreements with larger balance sheets can attract more borrowers, thereby increasing the interest paid to lenders.
The long-term challenge of guiding both "demand" and "supply" in the bilateral market (ie, supply and demand challenges) also pertains to DeFi agreements, that is the access point for active investors.
For example , a DEX (such as Uniswap) that adopts an automated market maker strategy needs to give a large amount of liquidity in the beginning before it can be used. Investors who is able to supply the first liquidity pool can capture significant value by detatching the very first major obstacle for the exchange. Similarly, for a lending agreement that is critical to the total amount sheet, investors who is able to inject additional capital to the loan pool should be able to somewhat increase the odds of getting a reunite using this investment.
As a result of advanced level of information asymmetry in the DeFi field, the positive fundamentals of cryptocurrencies could be overlooked. An active investor who has received widespread attention may also greatly increase the exposure of the DeFi agreement through support and thought guidance. Above all, these DeFi agreements are trustworthy for investors that are also high level users of the DeFi agreements where they invest.
Investors that are tinkering with DeFi can also disseminate comments and feedback on the DeFi agreement to followers who've similar interests in the agreement. Normally, this is among the best approaches to build users and community members. Investors utilizing the DeFi agreement frequently also comprehend the intricate information on the agreement, and may use occasional information asymmetry to profit.
Therefore , In my opinion a cryptocurrency investment method that combines fundamental research and active participation is the biggest way to obtain sustainable returns. We have been just starting to realize the huge potential of the overlap between your general user and investor (ie DeFi token holders) community.
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