Talking about the development history and future of DeFi

Author: Dacong  Fred Source: X: @Dacongfred)

1. Project division: financial faction VS Web2 combination faction

After the ETH ETF was passed, the entire market fell sharply as expected, which was exactly the same as the trend after the BTC ETF was passed.

Based on the impact of ETFs on the market, we can summarize the US ETF model: Before the launch, expectations were full and there was a big rise; after the launch, the good news was exhausted and it began to fall; then due to the final good news after the ETF was passed, it gradually rose slowly.

However, looking back on this cycle, although there are narratives about AI, DePIN, and Restaking, there has never been a hot track and project like the previous cycles, such as Uniswap leading the Defi summer, the NFT craze where everyone changes their avatars, and StepN causing the whole people to participate in the movement. This also makes many investors and builders confused about this cycle. What kind of appearance will the bull market of this cycle greet us?

Everyone has made different choices, whether choosing to build the BTC ecosystem, build on the DePIN/AI track, or be devoted to meme full-time cryptocurrency trading, everyone has made bets based on their respective beliefs.

In general, the current exploration of projects can be roughly divided into two schools. One is the financial school, which believes that the development of Web3 must be closely related to financial familiarity. Whether it is Defi, NFT or BTC ecology, the essence is still to make a fuss around financial gameplay and asset attributes; the other school is the web2 combination school, social, games, infrastructure (DePIN), AI, etc., hoping to combine the web2 track with blockchain/cryptocurrency to explore new scenarios. In previous research reports and analysis articles, I have discussed the development status and challenges of the combination of AI+Web3, as well as the development status of the BTC ecosystem. Today, let’s talk about Defi, a representative track in the financial sector.

2. Why DeFi can explode - the exploration of pioneers

Defi is a track that has been talked about for a long time. Whether it is Uniswap, the most representative in Dex, or dYdX in the derivatives track, Defi plays a very important role in a public chain and even the entire web3 industry.

Before the birth of Dex, people traded cryptocurrencies through centralized exchanges. The advantages of centralized exchanges are the same as web2, fast speed and simple operation; however, the disadvantages are also obvious, low transparency and poor security. The subsequent collapse of a certain CEX giant also broke the hearts of many people. Especially for web3 users, asset ownership, security and transparency are placed in a very important position.

In 2018, Uniswap V1 realized a decentralized exchange by adopting the automated market maker model (AMM), allowing users to trade directly with smart contracts instead of the traditional order book model of buyers and sellers, thus emerging and leading a new track; later V2 and V3 had new features such as built-in price oracles, support for centralized liquidity and multi-layer fees, and continuously optimized the user experience of using Dex. Uniswap has firmly occupied the leading position in the Dex track since its inception.

On the other hand, dYdX, as a pioneer of Defi derivatives, chose to use the order book model to provide leverage and contract trading services, which is closer to the traditional financial model in terms of operation. With relatively high liquidity and a large number of trading pairs, it once occupied a high market share in the derivatives track, and together with Uniswap, it led the Defi Summer event.

3. Defi's challengers andthe future

Later, in the development of Defi, the development of Dex and derivatives showed two clearly different routes.

1) Dex binding chain mode: From the perspective of Dex's TVL, the development of Dex is basically inseparable from its binding with a certain chain. Whether it is the take-off of Uniswap and Ethereum, or Pancake binding to BSC, Raydium binding to Solana, and then to Velodrome on Optimism, Aerodrome on Basechain, Dex, as a necessity for public chains, is essentially the same for each Dex. Whether it takes off or not, it actually needs to be bound to the chain, and its TVL performance is often highly correlated with the position of the chain. 2) Derivatives innovation model: On the other hand, the generational change of derivatives is more about innovation in gameplay. For example, GMX was only launched in 2021, and it has already defeated the previous leader dYdX. Next, let us further analyze why GMX has emerged as a dark horse before, and what are the innovations of GMX compared with dYdX. I think there are two core innovations: 1. The model of LP providing a capital pool: GMX uses the model of LP providing a capital pool, combined with oracle quotes, so that users can maintain low slippage while trading quickly; - Good for users 2. Innovation in profit-sharing mechanism: 70% of the revenue is distributed to liquidity providers (GLP holders), and 30% is distributed to GMX operating token holders. - Good for liquidity providers These two innovations accurately grasp the two ends of the transaction: users and liquidity providers, so that they can catch up and become the new leader of derivatives. After GMX, some interesting derivatives projects have also emerged and are eager to try. For example, the transaction volume of SynFutures on the Blast chain has hit new highs recently. After a careful look, I found that there are several points worth noting: 1. The wealth effect of the Blast chain: From Blur to Blast, the Blast chain has had a wealth effect since its inception. SynFutures' choice to deploy on the Blast chain is a very smart choice. —— Attract users

2. oAMM centralized liquidity: Similar to Uniswap's centralized liquidity strategy, SynFutures' oAMM allows LPs to add liquidity to a specified price range, thereby improving liquidity depth and capital utilization efficiency; —— Beneficial to liquidity provision

3. oAMM does not require permission to list coins: In addition, oAMM, like other spot AMMs, supports permissionless listing of coins, so that anyone can create a perpetual contract for trading pairs, making the range of currencies unlimited - beneficial to liquidity providers

Currently, SynFutures' daily trading volume exceeds US$1.3 billion, surpassing the old star projects dYdX's US$1.2 billion and GMX's US$180 million (not in the top ten). It has performed very strongly in terms of trading volume, bringing new vitality to the derivatives track.

In general, both the financial faction and the web2 combination faction are looking forward to more native and interesting projects, involving more people and money, and finding a supportable detonation point for the bull market outbreak in this cycle in the short term. In the long run, it will penetrate more into the traditional world and give birth to more mass adoption.

Original link