DeFi ‘s prosperity from data persepctive
DeFi: Decentralized Finance, Code drives new finance in the future?
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0x01 The DeFi ecosystem is relatively complete
DeFi emerged in 2018, and after two years of development, it is booming in 2020. At present, DeFi has formed a relatively complete ecosystem, involving Payment, Lending, Stability Currency, Decentralized Exchange (DEX), Derivatives, Insurance, etc.
0x02 Liquidity mining is one of the main reasons for the growth of DeFi
- Liquidity mining refers to providing liquidity for DeFi projects on Ethereum.The process of obtaining benefits (governance tokens, transaction fees, etc.) Liquidity mining is essentially a token distribution and incentive mechanism.To attract users to deposit certain tokens and increase the liquidity of DeFi projects.
- Liquidity mining is one of the main reasons for the growth of DeFi at this stage.
- As the two largest decentralized lending projects at present, the expansion of Compound and MakerDAO’s lending scale has stimulated the development of the decentralized lending market. Among them, Compound’s total borrowings and capital scale were 38 times and 14 times that of the beginning of the year, respectively; Maker’s total borrowings and capital scale increased by 71% and 80%, respectively, compared with the beginning of the year.
0x03 Lending Project — Compound
- Compound is a smart contract that allows users to lend and borrow tokens. Similar to your bank, Compound lends your money to borrowers and earns interest over time. But unlike a bank, your interest is compounded from the moment you deposit into Compound’s smart contract. Because this is a smart contract, there is no middleman in the whole process, so the interest will be higher than traditional banks.
- On Compound, lenders make deposits directly to the fund pool to form the underlying assets. Assets deposited in the fund pool can earn interest on lending, and can also withdraw deposited assets at any time. On the other hand, after the borrower deposits the mortgage assets, it can obtain loans from the capital pool, and the smart contract will automatically match the loan demand.
- Similar to MakerDAO, Compound’s loans are established through over-collateralization. Borrowers deposit tokens into Compound to increase their “borrowing power,” and if a borrower’s borrowing power falls below 0, their collateral is sold to pay off debt. In addition, the loan interest rate for each asset is different, which is determined according to the demand of the asset.
- The Compound protocol allows developers to build various money markets based on Ethereum.
- The so-called “money markets” is actually an independent currency pool unit. There is only one token in each currency pool. The protocol determines the interest rate of the currency loan in this pool through an algorithm. Simply put, the algorithm automatically calculates the interest rate based on the supply and demand of people lending and borrowing the coin.
- In the Compound protocol, each token (such as Ether, Dai, USDC) has its own lending market, which contains the balance of each user in this market, as well as each valid loan transaction, and even each period historical interest rates, etc. Users can seamlessly borrow money from the agreement through the collateral credit line, you only need to see which coin you want to borrow, and you can borrow money immediately without communicating with others the repayment date and interest rate . Borrowing is real-time and predictable. Every currency market has a floating interest rate determined by the market.
- The Compound protocol enforces a rule that each account must have enough balance to repay the amount borrowed, called the collateralization ratio. Each account cannot do anything that will make the “Balance/Loan Amount” lower than the “Collateral Rate”. Such as borrowing more money or withdrawing the balance of the mortgage. To increase or reset the mortgage rate, users can repay the loan in full or in part. Any balances held by Compound, including those used as collateral by users, also accrue normal accrued interest.
- If a user’s collateralized equity, divided by the amount borrowed on their credit line, falls below the collateralization ratio, then their collateralized equity is sold (by borrowing the equity) at the current market price minus the liquidation discount. This mechanism will incentivize arbitrageurs in the system to quickly reduce the shortage of loan assets that borrowers cannot repay, thereby reducing the risk of the protocol.
0x04 DAI accounts for a certain share of the emerging stablecoin market
- As of July 16, 2020, USDT still ranks first in market share, accounting for 83.97%, followed by USDC, accounting for 9.23%. It can be seen that in the short term, the additional issuance of USDT has not affected investor confidence. In the emerging stablecoin market, as of July 16, 2020, the total issuance of the emerging stablecoin market was $1.93 billion. Among them, USDC is worth 1.11 billion US dollars, accounting for 57.44% of the emerging stablecoin market; PAX and BUSD ranked second and third respectively. The decentralized stablecoin DAI, which occupies a key position in the DeFi ecosystem, has a total issuance of US$110 million, accounting for 5.77% of the emerging stablecoin market share.
- MakerDAO is a Decentralized Finance (DeFi) project with a crypto-collateralized, stablecoin DAI pegged to the US dollar.Users generate DAI by locking cryptocurrency in a Maker Vault at a certain Liquidation Ratio.
- The rise of “liquidity mining” has made Dai a popular asset choice. The strong market demand has pushed the price of Dai up, making it impossible for Dai to maintain a soft peg with the US dollar to a certain extent. In order to ensure the stability of Dai, MakerDAO launched the “pegging stability module”, which supports users to mint stable coins such as USDC into new Dai at a 1:1 ratio under the total limit.
0x05 Decentralized Exchange — Uniswap
- Uniswap is a decentralized trading platform protocol built on Ethereum. Rather, it is an automated liquidity protocol. There is no need to use any order book or any centralized party involved in the transaction. Uniswap supports users to skip intermediary institutions to directly trade, bringing a high degree of decentralization and censorship resistance.
- In the model used by Uniswap, liquidity providers are required to create liquidity pools. The system provides a decentralized pricing mechanism, essentially performing smoothing on the depth of the order book. Uniswap is a decentralized protocol and does not require currency listing. Basically any ERC-20 token can be issued as long as the trader has a liquidity pool available. Therefore, Uniswap also does not charge any listing fees. In a sense, the Uniswap protocol is a public good.
- Uniswap abandons the traditional architecture of digital trading platforms, does not use order books, but uses the “constant product market maker model”, which is a variant of the automated market maker (AMM) model. x * y = k
- Uniswap is a decentralized protocol powered by Paradigm, a cryptocurrency hedge fund. All fees go to liquidity providers, and founders don’t take a cut of any transactions made through the protocol. The transaction fee paid to the liquidity provider in each transaction is 0.3% of the total amount. By default, these fees are injected into the liquidity pool, which can be redeemed by liquidity providers at any time. Transaction fees are allocated based on the liquidity provider’s share of the funding pool. UNI is the native token of the Uniswap protocol, which grants governance rights to holders. This simply means that UNI holders can vote on protocol changes. UNI will be issued to providers who provide liquidity to the following Uniswap pools: Any Ethereum address that interacts with Uniswap contracts is a community member.
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