Cao Yin explained 4 reasons and 5 directions for the rise of DeFi underneath the epidemic.
Original title: "Cao Yin: 4 explanations why the epidemic will detonate DeFi"
Author: Cao Yin, Managing Director of Digital Renaissance Foundation
Source: Block Rhythm
The brand new crown epidemic is raging all over the world. At the moment, with the exception of East Asia, the epidemic is still spreading rapidly in all countries. Even though governments have tried their best, no-one knows once the epidemic could be controlled. For most of us that are perhaps not sick, furthermore terrifying than the virus is where the severe economic and economic crisis due to the epidemic will need us after the epidemic. Some blockchain practitioners even start to doubt this is of their blockchain career as the technology cannot help.
Picture: MetaCartel member PeterPan doubted the value of the blockchain on Twitter and expressed his intention to leave the Ethereum community and digital currency completely
I really believe that the practitioner with this particular skepticism isn't just Peter Pan alone. Under the double blow of life threats and asset collapse, the morale of domestic and foreign communities is relatively low. Many people are wondering: So what can blockchain do?
As a DeFi practitioner and investor, I've no doubts at all, and I will be even filled with confidence. I will be not merely confident that mankind will eventually over come the epidemic, but also confident that DeFi can help those who have experienced the crisis. Actually , I will be more optimistic. Quite simply, the economic and economic crisis due to the epidemic will not only affect DeFi, it might even become an important chance to detonate DeFi.
I'd like to first analyze the effects of the economic and economic crisis that the epidemic could cause.
Demand for U. S. dollars has surged and investors have dumped assets for U. S. dollars. Considering that the outbreak of the epidemic all over the world, organizations and investors are worried that the global spread of the newest crown virus can cause economic stagnation, so they really seek the absolute most liquid currency. The financial market has trigger a wave of undifferentiated attempting to sell. Stocks, gold, foreign currency, commodities, developed countries and emerging market bonds have all been sold, exchanged for people dollars to be able to hedge, even though the Fed has urgently paid down interest levels to zero and launched a new Bond purchase plan, however the US dollar index, which reflects the usa dollar exchange rate, still quickly rose above 100. Other central banks have taken similar measures, but to date, these measures have didn't curb liquidity tensions and market panics. The dollar index remains high.
The pressure of local currency depreciation, countries have adopted strict capital controls. In the administrative centre market, investors have dumped currency assets of varied countries to cash out the usa dollar as a hedge. The currencies of developing countries such as for example South Africa, Mexico, Turkey, and Egypt have depreciated sharply, showing that investors are worried concerning the economies of the countries. Countries that depend on external financing may face an abrupt cessation of capital inflows and market disorder, thereby implementing temporary capital flow management measures. For instance , the Egyptian government has recently implemented capital get a grip on measures to restrict folks from utilizing their domestic currency to exchange dollars. Under the pressure of the epidemic, even the flag bearer of the free flow of capital, the International Monetary Fund, has loosened its attitude towards the administrative centre get a grip on policies of sovereign countries. In the newest IMF "Integrated Policy Framework", it has been proposed that sovereign countries could be tolerated. Temporary restrictions on capital flows.
Economic recession, major economies will maintain low or even zero interest levels for a long time. Due to concerns concerning the impact of the epidemic on the economy, since early March, central banks in significantly more than 30 countries including Canada, New Zealand, Australia, the United Kingdom, and Egypt have announced rate of interest cuts, and the Federal Reserve has done it in one single step. All the bullets were burnt out previously, and the direct reduced amount of 100 basis points directly paid down the federal funds rate to a historical low of 0-0. 25%. If the liquidity panic available in the market still can't be alleviated, or to stimulate economic growth in the recession after the epidemic, the Federal Reserve and other central banks could even adopt negative interest levels. This will have a long-term structural effect on global capital markets.
The chance appetite of the whole society has dropped sharply and saving is now an important life style. In accordance with historical experience, after major disasters and economic crises, investors' risk appetite will drop sharply, and differing capital expenditures will even drop sharply. Non-essential living expenses will even drop somewhat, and the savings rate of the whole society will soon be greatly increased. In particular, the consumption notion of people in Europe and the United States will soon be completely changed. Many moonlight people must reduce food and clothing, live inside their means, and vary from a credit card life style. For the savings card life style.
Economic + economic crisis, banks in developing countries are on the verge of bankruptcy. Each of the major financial crises has generated the bankruptcy of a lot of financial institutions, a lot of which are various types of banks. Following the Asian economic crisis in 1997, a lot of banks in Southeast Asia went bankrupt, causing lots of people to get rid of their savings. Get back. The epidemic crisis has cut off the international supply chain and trade in goods and services. Following the epidemic, many multinational organizations will even rethink their supply chain strategies, that might cause many production capacities to leave developing countries and come back to Europe and the United States. This will cause the bankruptcy of a lot of enterprises in export-oriented countries. At exactly the same time, it will cause the exchange rate of the countries to carry on to depreciate and increase the foreign debt burden of the countries. Banks will soon be under great pressure from both the asset side and the liability side. Banks which are slightly weaker will go bankrupt and cause systemic risks.
The results of the above mentioned crisis will severely hit the global economy, particularly export-oriented developing countries. Alternatively, DeFi on the blockchain will emerge as a new force because of its special attributes and functions, and can over come crises tit-for-tat, help more folks handle or even eliminate the impact of the crisis, and start to become a "special medicine" to over come the crisis.
The influx of safe-haven U. S. dollars into centralized stablecoins, and potential financial demand detonated DeFi lending. The amount of various centralized U. S. dollar stablecoins increased throughout the epidemic as the market for safe-haven demand. In accordance with statistics, in just March, various types of centralized The market value of stablecoins increased by approximately US$2. 1 billion, reaching a total of US$8 billion. At the moment, the rate of issuance is still increasing. The demand for additional issuance not merely originates from the speculative demand for bargaining BTC, but also lots of it originates from private hedging demand for buying U. S. dollars in other currencies through special channels and converting them into various U. S. dollar stable currencies. The technique is generated in the foreign trade url to help capital get a grip on countries' funds head to sea. Recently, as a result of epidemic, international trade has been blocked. A tiny part of these daily USD circulation needs have flooded into various USD stable currencies.
Chart: Total Issuance of Various Stable Coins
As the stock of stablecoins continues to improve, there's a huge financial demand for a lot of idle centralized USD stablecoins. Most of these stablecoins are ERC20 tokens issued on Ethereum, such as for example USDT and USDC, which may be directly utilized in the present DeFi Borrowing and lending within the agreement generate interest and transactions. More and more DeFi protocols will also be conscious of the financial needs of centralized stablecoins. The main-stream DeFi lending applications Compound, Lendf, Aave, and dydx have recently begun to aid various centralized USD stablecoin lending services. At the moment, the total amount of centralized stablecoins entering DeFi lending is still significantly less than 150 million US dollars. As various stablecoin holders realize the liquidity and security advantages of DeFi lending, a lot of centralized stablecoins will enter DeFi lending and financial management in the foreseeable future live.
Figure: Various stable currency loans on Lendf
DeFi payments and transactions will become a green channel for capital get a grip on countries. Even though capital get a grip on is dependant on the requirement to protect financial stability, it will seriously affect the conventional transaction and investment needs of enterprises and individuals, particularly in countries with relatively backward financial infrastructure. For instance , in Egypt and Vietnam, capital controls will prevent citizens from using international financial infrastructure, and the country's financial infrastructure isn't complete enough to even provide reliable basic financial services, such as for example cross-border transfers and financial asset transactions. The borderless and anti-censorship top features of DeFi enable users in regulated countries to use DeFi for cross-border and domestic payments and transactions, and also purchase DeFi synthetic assets to be involved in the international financial market.
Picture: USDT trading options on the Tokenlon decentralized exchange
A lot of zero rate of interest funds will soon be converted into stable coins to enter DeFi for spread arbitrage. The lower rate of interest and zero rate of interest policies of countries will remain for a long time, and also negative rate of interest policies will soon be introduced. Many arbitrageurs elect to arbitrage the spread between loans and DeFi deposits, and the high liquidity and security of the DeFi market makes similar arbitrage strategies almost risk-free, that may attract a great deal of funds to flow out of banks. Stable coins enter the DeFi market.
In addition , after the epidemic, the international capital market will soon be deeply reconstructed along with the international supply chain, and the administrative centre get a grip on policies of relevant developing countries will continue to increase. Consequently , in a new normal of deglobalization, development is underway. The rate of interest gap between countries and developed countries will become larger and larger, and borderless DeFi will become the best tool for international arbitrage capital to carry out cross-border rate of interest arbitrage.
Figure: Deposit balances and interest levels of varied stablecoins in DeFi lending applications
Users will see that DeFi savings are safer, higher yields, and much more flexible than banks. Following the epidemic, the financial systems of already fragile developing countries will be more fragile. The deposits of ordinary people in local banks may disappear at any time. During the epidemic, Yes Bank, India's fourth largest private bank, declared bankruptcy, putting an incredible number of customers' deposits at an increased risk. Similar situations will frequently occur in developing countries in the foreseeable future. At that time, people in developing countries will see it is perhaps not safe to store profit banks, and purchasing stablecoins in DeFi isn't just safe, but may also avoid the danger of local currency depreciation.
Recently, many projects have begun to supply DeFi deposit and withdrawal and deposit services. Dharma provides users in some countries with a one-stop DeFi service of free deposit and withdrawal + Compound deposit interest + payment this year. Users can directly deposit bank deposits through Dharma wallet Purchase DAI or USDC, and deposit into Compound. Dharma's services aren't only safer than banks, and higher than bank interest levels, even UI/UX are much better than banks, which is very attractive to ordinary savings users.
It isn't only Dharma who sees the chance of DeFi savings + payment. The entrepreneurial project Dipole has launched stable currency sales and DeFi savings services for the distributed solar market in Southeast Asian countries. On the OTC connected to Dipole, users directly purchase with local currency including All kinds of stablecoins including Dai, and elect to deposit in different DeFi lending agreements to earn interest. When power bills must be paid, stablecoins are accustomed to pay. For electricity users, electricity purchasers pay stable currency electricity fees It will likely be automatically deposited to the DeFi loan to earn interest, that may greatly increase the efficiency of fund utilization for both power purchase and power sales.
Picture: Dipole's product interface
Based on the above new trends, DeFi projects in the next directions will rise first in this crisis.
Stable currency deposits and withdrawals provide low-cost stable currency and fiat currency exchange services in an easy and convenient way. For instance , Dharma, by connecting to the third-party deposit service Wyre, users can directly purchase USDC and DAI with charge cards at zero cost. Nevertheless , there are still lots of gaps in the regional coverage of Dharma services, and the main-stream stable currency USDT can't be purchased, and after depositing, it is possible to only choose Compound financial management.
Stable currency financial management helps users manage stable currency assets on the chain, and provides a variety of low-risk floating rate of interest or fixed rate of interest financial services including interest on borrowing and interest on liquidity. At the moment, main-stream DeFi lending applications have provided similar services, however they do The very best is China's Lendf, which supplies a variety of stable currency financial services including USDT. The balance of stable currency deposits on Lendf has exceeded Compound.
Stable currency payment/receipt helps users to directly pay the financial assets in the DeFi agreement to the recipient's contract address through convenient techniques such as for example QR codes and SMS. For instance , Dipole provides electricity payment and collection services in Southeast Asia.
Community mutual assistance uses DAO to reach mutual financial assistance between users, helping informal employment groups who cannot obtain credit support and social security to obtain financial mutual assistance services similar to insurance. Participants can adopt a combined mix of off-chain governance + on-chain governance Ensure the proper execution of fund investment and recovery, and resolve disputes. Mutual aid funds could be directly deposited into DeFi financial management agreements to earn interest, ensuring efficient utilization of funds, and preventing the problem of misuse of mutual aid funds by managers of conventional centralized community mutual aid organizations.
The fixed-income asset liquidity tool provides on-chain mortgage discounting DeFi services for various conventional fixed-income assets including bonds, bank deposits, and ABS through the mixture of off-chain + on-chain asset clearing, preservation, and quotation. Micro-enterprises and developing country assets obtain financing and offer stablecoins in DeFi with controllable and high-interest income. At the moment, DeFi projects have begun to use similar services, such as the property tokenization project RealT. Users may use RealT to invest in tokenized property project equity shares and obtain part of the rental income. Nevertheless , RealT didn't solve the most important problem of similar projects, just how to ensure the continuity of the off-chain rental cashflow, and just how to preserve off-chain assets.
