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How to understand DeFi? (Part One): Stablecoins and Decentralized Lending



One of the hot words of 2020 is DeFi. You may have heard many people in the community talking about the amazing benefits they get through DeFi. So what exactly is DeFi? DeFi is the abbreviation of Decentralized Finance, also known as open finance, which refers to applications built on public chains. The purpose of DeFi is to create a financial service without a centralized institution, so that anyone in the world can conduct financial activities anytime, anywhere. The term DeFi was first coined in August 2018 by Brendan Forster, founder and CEO of crypto lending platform Dharma. Bredan Forster stated in the article Announcing De.Fi, A Community for Decentralized Finance Platforms published that month that Dharma jointly launched a DeFi community with 0x, Set, WalletConnect and other institutions, and believed that a DeFi project needs to meet the following four conditions: Bicc Wang Xiaobin, an early investor in CoinExchange: How to achieve high-speed processing under the premise of safety is one of the key points for the breakthrough of the underlying public chain of the blockchain: Jinse Finance live report, "2020 Cointelegraph Chinese Greater Bay Area·International Blockchain Week" August 5 It will be held in Shenzhen from 1st to 7th. Wang Xiaobin, early investor of Bicc currency exchange & manager of CWV main chain foundation, connected across the ocean to "the next round of public chain, how to answer CWV2.0", he said, how to achieve high-speed processing under the premise of safety is the underlying One of the key points of public chain breakthrough. Compared with the traditional public chain, CWV2.0 has obvious advantages in terms of speed, because it adopts the VRF (random verification method) consensus. During the operation of CWV2.0, it uses random functions to ensure the fairness and decentralized control of the block producing nodes. The realization of PBFT fault tolerance at the block height makes the main chain of VRF more stable, and the rapid block generation can be well realized at the ledger level. [2020/8/7] Open source financial application codes built on the decentralized public chain have a complete developer platform. After more than two years of development, various projects have emerged in the DeFi ecosystem, almost All products in the traditional financial system have been reinterpreted in DeFi through blockchain and smart contract technology. Director of OKEx Financial Markets: The future of cryptocurrencies depends on how CBDC develops in the future: On May 24th, OKEx Financial Market Director Lennix Lai said that adapting to China's CBDC is not so difficult, because the use of cash has declined, which means Thanks to the entry of electronic payment systems such as Alipay and WeChat Pay. Lai noted that the notion of financial privacy in China is long gone given the fact that China has been using electronic payments that require KYC and other security processes, but this could become a problem when central banks in other countries are issuing CBDCs. On the other hand, the fact that a Chinese CBDC is directly under the power of the central bank and does not provide any financial privacy may prompt people to start turning to cryptocurrencies. Therefore, the launch of a Chinese CBDC could indeed promote and bring awareness to the use cases and importance of mainstream cryptocurrencies. Additionally, he stated that the future of Bitcoin, Ripple, and other cryptocurrencies depends on how CBDCs develop in the future. If people realize the need for financial privacy, they may flock to Bitcoin, but in countries where financial privacy has long existed, this decentralized currency may be marginalized. (AMBcrypto) [2020/5/24] Stable currency is a digital asset that anchors legal currency and maintains price stability. Most cryptocurrencies are very volatile, and stablecoins make DeFi applications more usable to the masses due to their stable prices. Stablecoins can be divided into three categories according to their mechanism of maintaining price stability: stablecoins collateralized by fiat currency, stablecoins collateralized by cryptocurrency and algorithmic stablecoins. News | Finnish customs are confused about how to deal with the seized bitcoins: Jinse Finance reported that the customs under the Finnish Ministry of Finance has been considering how to deal with the 1,666 bitcoins seized from drug dealers a few years ago. It is reported that the Finnish Customs does not want to auction the confiscated bitcoins because they may be returned to criminals. The bitcoins were worth less than 700,000 euros (about $760,000) at the time of seizure. As of now, the 1,666 bitcoins are worth nearly 15 million euros (over $15.5 million), according to Coin360. According to reports, the agency initially planned to auction off the funds in 2018, but ended up freezing the bitcoins on "anti-money laundering" grounds. In addition to holding more than $15 million in bitcoin, Finnish customs also hold a number of altcoins worth millions of euros, the report states. [2020/2/26] Data source: The top five CoinGecko stablecoins by market capitalization are USDT, USDC, BUSD, Dai, and UST, among which USDT, USDC, and BUSD have at least one dollar of assets behind each stablecoin. Mortgage serves as value support. Indian digital currency exchanges ask the government to clarify how to collect taxes: The Indian government has been cracking down on digital currency-related tax evasion, but has not provided clear guidelines on how to collect taxes. Seven digital currency exchanges are asking regulators for clarification. Abhishek A Rastogi, a partner at law firm Khaitan & Co, believes that the tax rate will depend on whether the government treats Bitcoin as a currency, a commodity or a service. [2018/1/7] Dai is a stable currency collateralized by cryptocurrency, issued by MakerDAO. Users can mortgage digital assets such as ETH and BAT to Maker's smart contract and lend the stable currency Dai. Maker maintains the price of Dai at around $1 through mathematics and economic incentives. What is the price stabilization mechanism behind it? When the price of Dai is lower than the target price on the demand side, Maker will increase the Dai deposit rate to encourage users to buy Dai in the market and deposit it in the Maker platform to earn interest; on the supply side, Maker will increase the Dai borrowing rate to encourage users to return some Dai . When the amount of Dai on the supply side decreases and the amount of Dai on the demand side increases, the price of Dai rises to the dollar-pegged level. After the blockchain experiment triggered a sharp rise in Baofeng’s stock price, Baofeng first responded to how to avoid the risk of speculating in coins: It is understood that Cui Tianlong, the person in charge of Bokuyun and CEO of Baofeng Xinying, explained the possible BFC hype phenomenon that speculators may have. Cui Tianlong said, "We definitely don't want to see this kind of hype. But if it happens, we still have a lot of means to control it." He cited as an example, "For example, a very simple method, I only need to bind the price of BFC points and the exchange of my products on my official website, basically anchoring its value, which will greatly limit the hype of BFC.” [2017/12 /13] When the price of Dai is higher than the target price on the demand side, Maker will reduce the interest rate of Dai deposits, encouraging users to take out the Dai stored in the Maker platform and sell them in the market; on the supply side, Maker will reduce the interest rate of Dai deposits, encouraging users to increase Borrow some Dai. When the amount of Dai on the supply side increases, the amount of Dai on the demand side decreases, and the price of Dai falls back to the dollar anchor level. This balance of supply and demand ensures that Dai is stable at around $1. Another stablecoin that didn’t make the top five but deserves a mention is AMPL. A friend sent an email to imToken asking why the AMPL tokens in the wallet are lost every day, but there is no transfer record in the wallet? AMPL is the last of the three stablecoins, algorithmic stablecoins. The reason why the AMPL tokens in this little partner’s wallet is decreasing every day is related to the principle of maintaining price stability. The Ampleforth smart contract uses Chainlink's oracle and Ampleforth's own oracle (which Chainlink helped to build) to obtain token AMPL price data from two exchanges, KuCoin and Bitfinex, to check whether its unit price is between $0.96 and $1.06. Every day at 10:00 am Beijing time, the Ampleforth smart contract will increase or decrease the total amount of AMPL, and the daily total amount adjustment is called "Rebase". Daily rebase is based on AMPL market price. If the AMPL transaction price is higher than $1.06, the AMPL holdings in the wallet will increase after the rebase. If the AMPL transaction price is lower than $0.96, the amount of AMPL held in the wallet will decrease after the rebase. So if you find that the number of AMPL in your imToken wallet is constantly decreasing, it means that its unit price has been continuously below $0.96 recently. In theory, Ampleforth will flexibly adjust the supply through Rebase to maintain the price stability of its tokens. However, the actual market performance of AMPL fluctuates greatly, and AMPL has fallen into a "death spiral" more than once - the price fell, the total supply decreased, and users were affected by market panic, and continued to sell AMPL, causing its price to fall further. However, the algorithmic stablecoin itself is still of great significance to the closed loop of the blockchain ecology. Note: AMPL is anchored at the purchasing power of US$1 in 2019, and the price of AMPL tokens denominated in US dollars will continue to rise in the future. If AMPL is pegged to the current purchasing power of $1, it will experience the same 2-3% annual inflation as the U.S. dollar, defeating its original purpose of being "stable". The DeFi protocol provides users with a platform for asset lending. Maker, Aave, and Compound are all representatives of lending platforms. The Maker lending mechanism was introduced above. I can mortgage $150 worth of ETH in Maker. According to the minimum mortgage rate requirement of 150%, I can lend up to 100 Dai. You may be wondering, why can only 100 Dai be loaned out with $150 worth of ETH mortgaged? In fact, all current mainstream DeFi lending is over-collateralized. If you want to lend $100 of assets, you must provide at least $100 more collateral. Mortgage rate = value of collateral / value of loaned assets * 100% The mortgage rate of different lending platforms is different. Over-mortgage ensures that the lending platform will not be under-mortgaged and ensures that there are sufficient funds to pay the depositor's principal and interest . When the value of the borrower's collateral drops to the liquidation threshold specified by the lending platform, their collateral will be liquidated to ensure the solvency of the lending agreement. So why am I willing to over-collateralize as a lender? When I am in the following two scenarios, I am willing to do this. Fund turnover: I am in urgent need of cash, but I believe that ETH will appreciate in value and I am unwilling to sell it, so I deposit ETH in the lending platform, lend Dai to solve the urgent need first, and then redeem ETH after the capital turnover comes back. Investment leverage: Mortgage ETH to lend Dai, and exchange the loaned Dai for ETH on the exchange. When the price of ETH rises, exchange part of it for Dai and return it to the mortgage platform to get back ETH. The remaining ETH is my profit. This is looking at the lending platform from the perspective of the lender. The funds of the lender come from the depositor, and what benefits can the depositor get from it? The first is interest on deposits. Users who deposit in the lending platform Aave will receive the corresponding aToken, if they deposit USDT, they will receive aUSDT, and if they deposit Dai, they will receive aDai. aToken is a certificate of debt, indicating the money owed by the Aave platform to depositors and the accumulative interest payable. Therefore, the value of aToken in the wallet is constantly increasing, because the interest is accumulating. In addition, users can also mortgage aToken to other DeFi projects to obtain more income. The revenue of the decentralized lending platform is similar to that of the traditional lending platform. Part of it comes from the difference between the lending rate and the deposit rate, and the other part comes from the liquidation penalty. When the market falls and the borrower fails to replenish the collateral in time, causing the mortgage rate to be touched, the collateral he originally deposited on the platform will be auctioned by the system, and the system will take part of the proceeds after the auction as a liquidation penalty. The difference between traditional lending platforms is that the capital flow of decentralized lending platforms is transparent, and the rules of contract execution are also clearly recorded on the blockchain, which can be queried by everyone and cannot be operated in the dark. Today we introduced what is DeFi, decentralized stable currency and decentralized lending. In next week's "How to understand DeFi?" (Part 2)" We will continue to introduce decentralized exchanges, decentralized derivatives and decentralized insurance.


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