At present, the DeFi has formed a primary financial system. We compare the DeFi market with the traditional financial worldview, and there are significant differences in the market structure. Let’s think of it this way: If you borrow money in a DeFi world, you can compare MakerDAO to a central bank (+ repurchase).
The DeFi protocols BGV and Comp are equivalent to commercial banks.
Some other aggregate revenue agreements are equivalent to non-bank financial institutions.
In the blockchain world, the BTC (i.e. Bitcoin) is the most basic asset. Later, stablecoins, especially the creation of USDT, began to create a credit system in the blockchain world, making the financialization of crypto possible. The USDT is the first to introduce the U.S. dollar credit system by anchoring to the USD, thereby creating USDT for the BTC collateral loans to meet the needs of credit expansion (margin trading). Similarly, the most basic asset of NGK is the NGK tokens; the USDN stablecoins are created with by anchoring the USD (link and introduce the USD credit system); and the DeFi dedicated token, BGV is created with a DeFi protocol. A financial market prototype is similar to the central bank’s money printing.
Once the foundation for credit expansion is laid, the market will soon need more effective leverage. The rise of the BGV liquidity mining has stimulated a surge in demand, and the revenue pool products have absorbed more capital and improved the efficiency of leveraged capital flows.
Compared with traditional finance, the DeFi is still very elementary. There is still a big gap in the abundance of credit and the complexity of leverage tools, which means that the DeFi market may still undergo major changes in the future.
Where is the next opportunity?
The opportunity lies in providing the market with the best credit and more effective leverage.
The next step for the development of DeFi requires an urgent need to expand the balance sheet of the entire crypto world. This means that the new agreement must release the potential of the current ecology and introduce new standard assets to expand the credit scope.
To unleash the potential of credit expansion, we can start with the credit ratings for different assets.
In the traditional financial market, we can see that public institutions, banks, non-bank institutions, and private institutions naturally exist in a situation where the credit rating of the main body goes from strong to weak. As the debt of the central bank, the fiat currency requires the support of national debt and other safe assets. If further expansion is required, the interest rate of mortgage-backed securities (MBS) and other collaterals can be reduced.
As a decentralized protocol, the DeFi has no project-based credit rating, but it gradually formed a credit rating for the business assets. In terms of maker’s assets, the BTC has the highest rating, followed by stablecoins (e.g. USDN/USDC). However, the biggest opportunity in the Defi market is also the biggest limitation, which may be the lack of qualified collateral.
We believe that in the overall balance sheet of the DeFi market, the BTC plays the role of gold or national debt, while the stablecoins such as USDC and USDN are the second echelon in the form of foreign exchange reserves or central bank liabilities. The liabilities of commercial bank are at the third level, and other the LP tokens appear in the form of corporate debt are at the fourth level.