Redefining DeFi: DeFi tokens have fallen sharply, and technological progress may support the next rebound.

The DeFi week was notable for its lack of noteworthy events. Nobody sets a new record for the fastest cracking of a new contract, commits a famous exit scam, or plays tricks.

You can feel something different now. It used to be that every weekend we would discover some new exotic treat, or someone would launch a vampiric attack on another protocol, cleverly disguised as a Ponzi scheme.

Not that nothing happened this week, it's just that the horizons feel different this time around.

What has really attracted attention is the price crash of a large number of DeFi tokens, which is well reflected in the various DeFi indices launched recently.

The DeFi Pulse index fell by more than 20% in a week

Weiss Rating: Blockchain has nothing to do with the government, it is redefining governance: On August 6, Weiss Ratings, a cryptocurrency rating agency, tweeted that Ripple CEO Brad Garlinghouse said that blockchain is Governments around the world are offering an alternative to the current strained financial system. We do not agree with him. Blockchain has nothing to do with governments. Blockchain is redefining governance. Government today is top-down and centralized. Based on consensus, encryption hopes to replace these vertical systems with more horizontal systems. It's understandable that Garlinghouse doesn't see the value in decentralization, since he also manages a federated network. Perhaps the marked difference in success compared to decentralized cryptocurrencies such as BTC and ETH will help XRP realize that it is on the wrong side of the road going forward? Only time will tell. [2020/8/6]

Compound’s COMP fell below its August low of $127 to touch $100. Now, Yearn Finance’s YFI is down 66% from its all-time high. SushiSwap’s token has entered a death spiral: After peaking in September and falling nearly 90%, it’s down another 50% since the last news. The Uniswap token fell below the $3 psychological barrier.

HBTC Hobbit Elsa: HBTC launched a crowdfunding liquidity listing solution, redefining the exchange listing model: at 20:00 on the evening of June 2, Elsa Qiu, Vice President of HBTC Business, and Haze, Head of Operations at BitUniverse in China It was the first time to connect live video and give a lecture on "The Hobbit's First Order of Grid Trading". In the live broadcast, Elsa said that in response to the pain point of some existing high-quality assets lacking market value management support, HBTC Hobbit will launch a "crowdfunding liquidity listing plan" to redefine the exchange listing model. Through this currency listing plan, it will effectively reduce the problem of low liquidity in the early stage of high-quality projects, and ensure the smoothness of platform user transactions, so as to achieve a win-win situation for trading users, communities, and trading platforms. In the crowdfunding liquidity listing scheme, the HBTC Hobbit trading platform will recruit several Hobbit braves for high-quality assets. With tokens equivalent to 5,000 USDT, you can apply to become Hobbit braves for currency listing assets. In addition, Hobbit Braves can also call on community forces to recommend high-quality assets for HBTC Hobbit.

HBTC Hobbit Exchange is a trading platform shared by 100% currency holders, and is jointly invested by 56 high-quality capitals such as Huobi and OKEx. After nearly two years of stable operation, HBTC can provide customers with currency, contract, OTC, options and other businesses, and the mainstream currency and contract transactions on the platform have industry liquidity and depth. [2020/6/2]

Do fundamentals support current levels?

Voice | Shuidichou CEO: Blockchain may redefine the application of Fintech in the financial and public welfare industries: According to China.com, Shen Peng, founder and CEO of Shuidichou and Shuidihuzhu, said: "I believe that blockchain technology will be gradually applied to the financial industry. Various subdivisions of the industry and the public welfare industry may even redefine the application of Fintech in the financial and public welfare industries, making the business more transparent and credible. We hope that through our existing business, we can promote blockchain technology in more useful fields. Application in the scene of social value.” [2018/10/25]

One hope is that the total value locked (TVL) in DeFi remains high at $10 billion, which some analysts say is a sign of solid fundamentals.

I disagree with this. I've written at length that with the advent of liquidity mining, TVL really doesn't represent anything. The reason why Uniswap, Compound, SushiSwap, Curve, etc. have a high total value locked is that new tokens are continuously issued to incentivize them. Protocols like Maker or Aave also get a second windfall from DAI demand or token price increases.

Live | Deng Ke, CEO of Quanshulian.com: The chain energy economy will redefine the production relationship from three aspects: Jinse Finance live report, at the 2018 Summer Davos Night + Blockchain Thinking Conference held today When talking about the redefinition of the production relationship of the chain energy economy, Deng Ke, CEO of Prime Number Chain Network, said that the chain energy economy will redefine the production relationship from three aspects: 1. From the buyer's market to the seller's market. With the continuous development of social productivity, the measure of commercial value has shifted from the buyer's market to the seller's market. 2. From production economy to attention economy. With the abundance of products in the market, the attention of consumers is surpassing the means of production to become the most important commercial resource. 3. From share economy to chain energy economy. Equity represents the interests of corporate shareholders, and chain energy represents the interests of consumers. [2018/9/17]

SushiSwap and UNI tokens were launched before these tokens pumped

On-site | Yi Lihua: Tokens redefine rights and incentives: Jinse Finance live report, at the China Blockchain Industry Development Forum, Yi Lihua, founder of Leading Capital, said that blockchain redefines trust systems and organizations Relationships, this small change has brought about a new trust change that breaks away from the existing central organization. Bitcoin redefines assets. Tokens redefine rights and incentives and are the foundation of blockchain economies. Tokens allow more people to participate in events more efficiently and valuablely, and even labor relations will change because of tokens. [2018/7/11]

The problem of double counting also becomes very apparent. For example, WBTC is valued at $1 billion in the DeFi Pulse ranking. Over 83% of the supply comes from other projects, notably Uniswap, Maker, and Curve.

A major source of double counting is DAI — the collateral used to create it is designated Maker TVL, which is then counted when it enters Uniswap or Compound. In the case of DAI, one could argue that the collateral and the stablecoin themselves serve different purposes, so it makes sense to consider both. But WBTC is just a token, it will not do anything by itself, just like calculating the Ethereum supply as TVL in DeFi.

Regardless, I don't think the community has realized what's going on. We saw Ethereum network congestion and DeFi peaking in terms of users and activity. It's been a great journey, full of dubious stuff and outright success (for example, I'm amazed at the liquidity and volume on decentralized exchange Uniswap).

In recent months, the average gas fee has been ridiculously high. Source: Etherscan

But now, similar to cryptocurrencies in 2018, it's all about scaling and growing to bring about the next wave of projects and success. I’ve heard explanations like this: The people driving this rally believe that this is DeFi driving the mainstream market, and the market size will reach hundreds of billions of dollars.

Instead, all we get are blockchain congestion and valuation metrics that reflect circular dependencies and poor accounting. Unfortunately, when the market rallies too much, they can also become very unhappy when they realize that the fundamentals behind the rally are insufficient.

So the point is, I don't think the market is really done selling off. I don't have a grasp on predicting the future, I could be wrong, but I've been in crypto long enough to know that until everyone starts talking about technology and the challenges ahead, while criticizing an overly bullish bull market, we haven't hit bottom. (So basically everyone is like me.)

At the same time, I think it's worth thinking about how technological advances might underpin the next rally.

DeFi interoperability gains momentum

There are two main ways DeFi can scale in the short term: Ethereum second-layer solutions and bridging to other blockchains.

Competition on all fronts is fierce. Among the second-layer solutions, the main contenders are Optimistic Rollups and Zk-Rollups. The former allows developers to port Ethereum smart contracts almost one-to-one, but has many user experience issues. The latter seems easier to use, but requires the contract to be rewritten into a new language. Both types are still in beta and we expect to launch in 2021.

While we wait, there are many other blockchains eager to offer their throughput as an alternative to Ethereum. Polkadot is very clearly positioning itself to accept Ethereum's liquidity, but there is also Binance Smart Chain, NEAR, Serum/Solana, NEO, Cosmos, etc.

The latest contender is RSK, which announced its Dai integration this week. It becomes fairly easy to transfer liquidity there in a relatively stable form and then use it within the RSK DeFi ecosystem.

But the problem now is that all the bridges are not functioning or centralized.

Additionally, the liquidity bridging approach may require a sizable DeFi ecosystem on another chain to be effective. Finding other use cases is critical, and if another blockchain can fill the need before Ethereum, it might win the race.

Right now, it's hard to predict who will win. Ethereum still has no reason to worry about its dominance.

Miners use their power to extract value from DeFi

An important, but possibly overlooked piece of news this week was the discovery of miners leveraging their capabilities to extract value from the DeFi ecosystem.

This confirms the theoretical concept of miner-extractable value (MEV) highlighted by some researchers in 2019. This problem stems from the fact that the order of transactions within a block is very important to DeFi, and miners are free to choose which transactions to include and in which order.

In this particular example, it appears that some small mining pools included transactions with 0 fees to take advantage of arbitrage opportunities. The fee is set to 2 Wei, so obviously the deal would never be done under normal circumstances.

The discovery could signal the beginning of the DeFi opening season for miners. But it’s not all bad, miners make good arbitrage traders and debt auction maintainers, so they can actually make the market more efficient. Of course, doing so would crowd out regular users.

The biggest threat is potential competition for high-value MEV among miners, which could lead to chain forks and reorganizations. I find this unlikely to happen, but MEV is definitely a serious problem in terms of overall fairness.

The main solution currently being researched is to "institutionalize" MEVs by holding auctions. Maybe a little more work to find a way to neutralize it, but enough time as the problem won't go away. Miner is a general term, anyone who controls blocks and transactions has the same ability. This includes stakers and certain types of second-tier operators.

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