CHK Blog: What problems await DeFi ecosystems?

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2021-06-19 11:49:13

As the cryptocurrency market has grown so fast and even dizzying in the past 1 year, surely what many investors are interested in, especially those who are interested in the DeFi market, will be the article. Which math problem will be the problem to be solved, resulting in a series of potential projects. Today, let’s take a look at some of the current notable issues, and may be fertile ground for DeFi projects.

Note: The article below is the personal opinion of the author, and should not be considered investment advice. And now, let’s go to the first problem. Enjoy!!!

Bitcoin is still the “boggart” of the market

It is easy to see that the Bitcoin Dominance index (Bitcoin’s market capitalization rate) has always fluctuated around 60-70% in the past 1 year (the period witnessed the “boom” of DeFi. dropped to 40% in the latest volatility of the market, but this is still quite a large proportion.

BTCD Index for the past 1 year

In addition, the correlation index (correlation) between BTC and altcoins in general (and DeFi in particular) is often very high, about 0.7 to 0.8. The great influence of Bitcoin is not only reflected in numbers but also in the general sentiment of the market, when anyone who buys altcoins is always worried about Bit, because when Bit falls 1, alt can crash to 10.

The closest solution to this problem is pool farms, which provide liquidity with BTC pegged to an altcoin. For example, the BTC-ETH pool farm requires users to lock BTC and ETH. This, about theory, can help altcoins not dump too deeply when BTC is fluctuating. When altcoins fall too deeply against BTC, the arbitrageur (one who takes advantage of arbitrage opportunities) will buy cheap altcoins to drop into the pool, and at the same time create traction to help altcoins not slide too far against BTC.

However, this solution has not yet spread, and The volume of these pools is too low compared to the size of Bitcoin. Even the very fluctuations of BTC also has the opposite effect psychologically also LPs (who provide liquidity in the pool), causing them to rush to withdraw liquidity and exacerbate price fluctuations.

If you settle down, you can lose your career, and if the DeFi market really wants to develop stably, it is necessary to minimize the influence of BTC, or… expect BTC not to fluctuate strongly.

Cross-chain

The fact that too many blockchains develop in parallel is inadvertently creating a problem, that is synchronization. Each blockchain will have its own token standard, so the bridges from ecosystem A to ecosystem B are extremely important.

This fragmentation creates for users a very uncomfortable and inconvenient experience when participating in a blockchain ecosystem.

On the blockchain project side, they need a simple gateway to attract money, otherwise every product layer they build in the ecosystem will go to waste. If supported by a centralized exchange with the same abundant money as BSC or SOL, this is not a problem.

For example, if a user has USDT in TRC-20 format, transferring this amount to CEX will not cost much. From CEX, continue to buy BSC’s BEP20 and Solana’s SPL tokens, then transfer to the DEX system of these two ecosystems. Thus, the money withdrawal process will be greatly supported.

But with these ecosystems without this competitive advantage, they will have to be very focused on the cross-chain array, simply to be able to attract money from other ecosystems.

Security – Reputation of the project

Easy to see, BSC blooms but also exposes a dark side of “decentralized”, which are scam projects and lack of quality.

The recent hacks on BSC are Technical error, not a rare occurrence or a black swan accident. You can learn more details through the articles below:

Therefore, the issue of prestige and security of projects, which is rarely talked about, has now received the attention of the community.

Certik is also a project that has implemented an audit system for a long time. However, it seems that the general psychology of the community is still not convinced that a project is labeled “audited”. Spartan Protocol used to be censored by certik but was also hacked once earlier this year while performing an upgrade to V2.

Therefore, this is still an issue that needs more radical solutions, besides the investor community itself must constantly monitor and improve their own information.

Liquidation

When capital is concentrated in liquidity pools, stake pools, a bottleneck for line money accidentally appeared. This in short term is beneficial to the token price, as the total circulating supply will decrease. However, long term, the token will not perform its essential role in an ecosystem, that is value transfer. And by not being secured by an activity in the ecosystem (for example, trading, exchange, …), the token itself will receive negative effects.

Top tokens with the highest lock value - Source: Staking Reward
Top tokens with the highest lock value – Source: Staking Reward

Undeniably, the fact that many tokens are staked on the network is a good point, as it helps to ensure security (especially with PoS – Proof of Stake systems). However, stake value ratio / total market cap It’s also something to pay attention to. If a token has too high a stake, it shows little circulation in the ecosystem and is a bad sign for the long-term health of a project.

The current “Liquidization” solution has a few new directions as follows:

  • Valuation of LP tokens: allowing users to mortgage LP tokens, and at the same time generate a new round of money making.
  • Create more interest paying pools for LP tokens or collateralized certificate tokens (eg cToken, yToken, aToken,..)
  • Liquidation of farming profits: This is the direction Pendle is taking, but it still needs more time to prove effective.

If the liquidity problem is solved, the cash flow from outside the DeFi market will have more impetus to pour in. Because simply, no one wants to put capital in a place where the money can be stuck, not continuing to rotate to make a profit.

“Legalize” the demand for NFT

Personally, I see, NFT currently exists as a separate market in DeFi ecosystems. More specifically, let’s take the lending, aggregator, and Transaction – AMM arrays as an example. These arrays have a close relationship with each other, this product takes resources (eg liquidity, user set, ..) from other array products to jointly increase the total value, helping to increase the total value. 1 + 1 will probably be greater than 2.

While, NFT currently being independent as a market for buying and selling pictures. There have been a few solutions for NFT collateral to mint stablecoins, in order to continue to re-establish cash flow, however, as mentioned above, these solutions are not complete.

Another problem is that liquidity of the NFT, when buying and selling NFT will be very difficult. Some projects have proposed to fragment the NFT into small pieces to make it easier to sell, but of course its impact is not too noticeable. Binance’s NFT Marketplace may be the solution everyone hopes for.

See more:

In addition to liquidity, will need a “cultural” push so that NFT will be more widely recognized, instead of just being seen as a game of “rice and clothes” as it is now. It should also be added that collecting in the West can be considered a culture, a hobby (of course, this statement is not biased towards positive or negative), while in the East, NFT can be considered is a financial game where the first comer “sells the vision” to the latter.

And this feeling of mine is stronger, especially after Binance (an exchange that has a strong influence on Asia’s fomo) joined the NFT game.

Ending

The above 5 issues are my personal views on the DeFi market. Hopefully the above article will give you a different and more interesting perspective on the current DeFi market.

Note: This article is for informational purposes only and is the author’s personal opinion. All of the above should not be considered investment advice.

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