Fundamental Insights
With more than two years of growth, DeFi’s TVL is now over $60 billion, and at its peak was once over $100 billion. By now, I believe no one is questioning DeFi’s future, so where does DeFi stand now? What investment opportunities remain?
In order to better discuss the logic of DeFi’s evolution, we can review the DApp development in 2019.
In 2019, the total transaction volume on the Ethernet chain is about $12.8 billion, and the DeFi type (transaction + financial) DApp transaction volume accounts for more than 90%. Among them, transaction DApps and financial DApps contribute 61.05% and 29.98% of the transaction volume respectively. And financial DApps started to see a relatively large growth in the second half of 2019.
In 2019, the distribution of the number of DApp transactions and transaction value is different. The number of transactions of game DApp and lottery DApp accounts for more than 50%, but their transaction value accounts for less than 5%, which shows that the amount of single transaction of these two types of DApps is small, and they require more real-time transactions, so this type of DApp is more suitable to be implemented in Layer2.
From the above “archaeological” data, we can see that in the DApp war in 18 and 19, DeFi DApps have already made their debut. The reason for this is that the initial growth of DeFi mainly relied on its Permissionless feature, which allows users to trade and lend without KYC, thus greatly lowering its entry barrier and satisfying users’ trading and lending needs.
In 2020, liquidity mining triggered DeFi Summer, which led to an explosive growth of DeFi. TVL, user volume, transaction volume and other project metrics all achieved huge growth. The “wealth creation effect” of liquidity mining and yield farming led to a large number of new users getting to know DeFi and increased DeFi’s TVL from the billion-dollar level to the 100-billion-dollar level.
DeFi has almost completed decades of traditional finance in two years, and has now completed early proof-of-concept in most directions and is moving into the mainstream market. In other words, DeFi’s large-scale qualitative change has been completed, and the subsequent development will focus on quantitative change. In terms of investment, the primary investment opportunities for DeFi are relatively small, while for some headline projects, the secondary market opportunities will be greater.
The early rise of DeFi relies on its unlicensed nature, and the medium-term outbreak relies on the wealth creation effect brought by liquidity mining or yield farming, but what is the long-term large-scale application relying on? I believe that for any technology to be used on a large scale, it must be the economic factors that make it decisive, and looking back at the history of several major technological changes, they were all due to new technologies that greatly reduced costs or greatly improved efficiency. Therefore, if DeFi is able to disrupt traditional finance, it will also be because of economic factors.
The biggest advantage of DeFi over traditional finance that we can see now is that its margins become almost zero. In other words, as long as the performance of the underlying public chain system allows, the cost of DeFi will not grow as the volume of the economy it carries grows. That is, DeFi’s current TVL is $100 billion, and as the public chain performance problem is solved and the TVL grows to $1 trillion or $10 trillion, its overall cost will not grow significantly.
As shown in the brain map above, a brief overview of each track is provided.
DEX
For the spot and aggregator track, Uniswap, Pancake, 1inch and other protocols have become the leading projects. For the newborn projects in this track, without essential innovation, their probability of success will be greatly reduced. Therefore, the investment opportunities in the primary market of these two tracks will mainly be in some new public chains and Layer2 solutions.
For contract & option DEX, although there are already popular projects such as Mcdex, perpetual, hegic, etc., but it still has not emerged as a clear leading project, so it is still worth paying attention to. For this track project, the logic of its success is similar to Uniswap, which mainly lies in no license and marginal cost.
Lending (Lending)
Similar to spot DEX, the collateralized lending track has been developing for two years, and Compound, Aave, and Maker have become the leading projects, so their primary market investment opportunities are relatively small. For unsecured lending, protocols such as Aave are being explored, but the progress of advancement is not ideal as it requires a lot of cooperation from the off-chain world.
In traditional finance, fixed-rate products make up a very large proportion of the market, while in DeFi, fixed-rate products have not made much progress upfront. The main reason for this is that DeFi’s early users preferred high-risk investments and fixed-rate products were not attractive to them. But as DeFi grows in size and more regular users enter, fixed-rate products will see continued growth.
Synthetic Assets
One of DeFi’s most innovative products is synthetic assets, and there are already headline projects such as Synthetix and UMA, but the track is still in its early days and there are still many opportunities for innovation, such as algorithmic stablecoins, arithmetic contracts, and other kinds of products.
In short, most of DeFi’s fundamental innovations have been completed, and their feasibility and reliability have been largely verified, so there are mature products to meet the regular needs of users for trading, lending, hedging, etc. DeFi has formed the prototype of the next-generation financial infrastructure, and for the headline projects, Uniswap V3 is mainly targeting professional users or institutions, and Compound offers 4% annualized financial management for traditional institutions. Compound offers traditional institutions the opportunity to manage their money at an annualized rate of 4%. As you can see, the top programs have started to focus their efforts on “volume” in order to strengthen their position.
In the future, it is still worth paying attention to the upper level of innovation of existing projects in the DeFi circuit, such as market making, insurance, options, TWAMM, etc., based on Uniswap V3, which is the next generation of financial infrastructure, providing a fully decentralized economic system for Web3 or Metaverse. Therefore, in the future, it is important to focus not only on innovations in this direction of DeFi, but also on innovations in DeFi + other tracks.
