Analyzing the Opposition and Unity of "Financial Speculation and Capital Allocation" in DeFi through DeFund
At this stage, DeFi can largely be described as a battle game in the stock market between the smartest whales and algorithm-savvy geniuses.Produced by: Jerry & BeeGee, participants of ThePrimediaDAO collaborative research and creation
ThePrimediaDAO is on a mission to achieve legends, based on a value judgment of upward pitch------we are in an era that will surely be recorded in the annals of crypto history, where heroes of the crypto world emerge. However, looking back at the past from this point in time, we may be disappointed to find that this has not happened; the crypto world has not seen the emergence of heroes.
We believe that the separation of speculation and faith has constrained the construction process of the crypto world. Specifically, the core issue is that the financial speculative nature of DeFi and the capital demands of Web3 applications have not been bridged, leading to stagnation in the development of native tokens for Web3 applications. This has also resulted in a limited total market for crypto assets to date, with many altcoins following the trends of BTC and ETH, which is also a constraint for DeFi players. Without considering the factors of infrastructure such as public chains, the mechanisms and rules of DeFi have evolved to their limits at this stage, but it has become a game of competition and even struggle between the smartest whales and algorithm-savvy geniuses. The notion that finance is essentially a zero-sum game permeates the DeFi ecosystem.
The essence of finance is to optimize capital allocation, directing capital to more efficient fields/regions. However, the physical world has many limitations; for example, due to licensing issues, global financial markets cannot connect with each other. DeFi connects the world through smart contracts, making the cost of obtaining capital within the global capital scope become averaged. This is a remarkable achievement, yet it has not been leveraged in empowering Web3/blockchain industries, but it is worth looking forward to------we may even bid farewell to the bull and bear cycles based on BTC fluctuations and enter a crypto economic market supported by fundamentals.
From the grand perspective of civilizational evolution, the agricultural civilization era was about resource allocation within regions, the industrial civilization era corresponds to cross-regional capital/resource optimization, while in the information/digital civilization era, it should match with a more efficient cross-temporal and cross-spatial allocation of capital/resources/computing power. This article will use the practice of DeFund as an example to attempt to analyze the possibility of DeFi in cross-temporal allocation of capital/resources/computing power and the value opportunities in empowering Web3 in this process. This is a win-win situation for both DeFi and Web3, which will be discussed in detail in the third part.
The article is divided into three parts: Breaking the Circle of "Whales and Geniuses" Speculative Game; Full-Chain Asset Management and Global Capital Allocation; The Opposition and Unity of Speculators and Believers, namely the opposition and unity of DeFi players and Web3 Builders.
1. Breaking the Circle of "Whales and Geniuses" Speculative Game
Reflecting critically on this topic, the most typical story is that of Justin Sun, a prominent figure in the crypto circle. According to on-chain data, when attempting to manipulate AAVE and Compound, Justin Sun's wallet net worth reached as high as $4.8 billion, with total assets exceeding $7 billion, of which $3 billion came from borrowing from Compound and Liquity. According to a report by GFX Labs, an address suspected to belong to Justin Sun borrowed a large amount of $MKR from AAVE and then proposed to create a DAI-TUSD trading pair in the community; subsequently, he borrowed a large amount of $COMP from Compound, deposited it into Binance, and used these $COMP to initiate a proposal to add TUSD as collateral on Compound.
Both operations were resisted and ended in failure, but they exposed the possibility of DeFi being manipulated by clever whales, and we are all acutely aware of the power of whales------the tricks of SBF have caused significant harm to the entire industry.
Compared to the destructive power of clever and resourceful whales, algorithm-savvy geniuses thrive even more in the DeFi world------Mochi Protocol uses its governance token $MOCHI INU to incentivize the liquidity of the USDM stablecoin in Curve, leveraging a large amount of $MOCHI INU to mint a significant amount of USDM; Mochi Protocol then converts USDM into DAI and uses DAI to buy a large amount of $CVX (the governance token of Convex Protocol, which holds a large amount of CRV voting power) to further compete for liquidity; and continues to use this liquidity to convert USDM into DAI, then buy $CVX, repeating the cycle. When the liquidity of USDM reaches $100 million, Mochi Protocol begins to cash out, depleting the liquidity in the pool, causing the USDM peg to fail, completing the harvest.
Overall, the current stage of DeFi can largely be described as a game of survival between the smartest whales and algorithm-savvy geniuses in a saturated market.
The V1 version of DeFund is positioned as a decentralized asset appreciation management platform, aiming to solve the problem of capital increment markets, expanding the current DeFi limited to the "whales and geniuses" inner circle game to the entire crypto ecosystem to explore the incremental market.
- Retail Investors
Retail investors can purchase funds like buying tokens, by filtering through the DeFund list, finding their desired fund, entering the details page, and clicking "Invest" to make a purchase. Depending on the market conditions at the time, they can choose to buy funds based on different benchmark assets to maximize returns. You can refer to the subscription for purchasing operations.
- Professional Investors
Professional investors typically have more knowledge related to DeFi compared to ordinary retail investors, allowing them to identify excellent funds among many and earn higher returns. Additionally, professional investors can also become fund managers themselves, providing fund services to other users to earn profits.
- Market Makers and Uniswap V3 LPs
Sufficient liquidity is essential for all DeFi applications, and DeFund is no exception. More market makers or Uniswap V3 LPs can provide liquidity on the DeFund platform not only to earn Uniswap's returns but also to gain additional profits as GPs.
- Institutions
Institutions may need to hedge their portfolio exposure to reduce overall investment risk. They can do this by purchasing stablecoins or ETH, WBTC, or USDC, DAI to go long or short for risk hedging.
- DAO Organizations
Typically, the treasury funds of DAO organizations have poor liquidity and cannot realize value appreciation. Through DeFund, DAOs can invest in relatively safe assets and also establish DAO funds to achieve additional returns for the DAO treasury.
DeFund hopes to enter the market as a stable appreciation service provider for blue-chip assets, focusing on blue-chip assets or assets that have undergone rigorous audits, with carefully selected fund managers and strict entry and exit mechanisms.
2. Full-Chain Asset Management and Global Capital Allocation
Dreams are abundant, but reality is stark. We must first face the contradiction that DeFi brings regarding the possibility of global capital allocation, as most lending protocols are deployed on different chains/L2s (Ethereum L1, Arbitrum, Optimism, BSC, Solana, Avalanche, etc.) with different versions. Users' lending across different chains/L2s is not interoperable, and liquidity is fragmented. Therefore, to achieve global capital allocation, we must first realize full-chain asset management, enabling capital liquidity across different chains/L2s.
From the very beginning of its design, DeFund V2 has considered support for more DEX & DeFi protocols to help funds enrich their sources of income, including but not limited to lending, staking, leverage, and even NFTs. By integrating with XXX & DeFund, DeFund can unleash greater and more possibilities. In short, the V2 version will bring more gameplay to users, helping them earn more returns.
V1 only supports Ethereum, while V2 will attempt to support cross-chain assets, with two current cross-chain implementation methods:
Multi-chain support, deploying DeFund contracts on multiple chains, maintaining different DeFi protocols on different chains, initially integrating with DeFi contracts that have already been deployed on multiple chains.
Cross-chain assets, with the continuous improvement of cross-chain bridge facilities like Wormhole and LayerZero, DeFi applications can manage and invest assets across chains. The cross-chain asset functionality of AAVE V3 is a good attempt in this regard.
DeFund will build its full-chain interoperability through LayerZero's Omnichain technology. Which cross-chain method V2 will support still requires specific research, and based on the development of the ecosystem and future trends, a suitable implementation method will be chosen to solve the liquidity fragmentation issue between different chains/L2s, thereby constructing a full-chain capital market.
On this basis, the main operational form of V1 GP is based on the interface, while V2 will provide GPs, OPs & LPs with greater possibilities for fund management, increasing fund strategies. GPs & OPs can set their own trading strategies, allowing the fund to operate automatically according to the set strategy, for example: Token Swap
- For tokens already held by the fund, buying and selling strategies can be set, such as:
a. Selling a certain quantity (percentage) of the token when its price rises to a certain indicator.
b. Buying a certain quantity of the token again when its price drops to a certain indicator, or selling a certain quantity of the token.
- For tokens not held by the fund, a strategy can be set to buy the token when it reaches the monitored price.
- For tokens already held by the fund, they can be converted into each other when a certain price exchange ratio is reached.
LP operations: When the profit (loss) of the pool exceeds a certain indicator, a portion of the liquidity is removed and converted into a certain token.
One-click asset conversion: When the fund's net value drops rapidly, assets can be quickly converted to the local currency to avoid losses; when the value of a certain token rises rapidly, assets can be converted to that token with one click to achieve higher returns.
At the same time, based on multi-source data analysis, the above three single strategies can be combined into a composite strategy to achieve greater returns. This will also be one of the continuous iteration goals of V2, allowing both GPs & LPs to achieve higher returns through better strategies.
More powerful investment statistics functions: In V2, more powerful data statistics functions will be added, not only to publicize and make fund-related information transparent but also to help GPs manage funds effectively, empowering GPs with the following features:
Current investment profit analysis data.
Fund warning information.
Uniswap pool earnings statistics.
3. The Opposition and Unity of Speculators and Believers
The opposition and unity of speculators and believers were manifested in the last cycle as the conflict between the crypto circle and the blockchain circle. However, as the narrative of Web3 and the metaverse unfolds, the conflict between coins and chains gradually diminishes, and a consensus is forming around the token mechanism of Web3 applications and the construction of a metaverse world economic system based on the crypto economic ecosystem; thus, the opposition and unity of speculators and believers are gradually evolving into the opposition and unity of DeFi players and Web3 Builders.
Speculators and believers are inherently contradictory------speculators still believe that finance is a zero-sum game, with profit as their primary goal, indifferent to whether it is decentralized or not, and even less concerned about the blockchain/Web3 returning user rights to users to realize the iteration of the value internet. They are even less aware of the grand narrative of reconstructing economic relationships and social relationships in the metaverse through decentralized, token mechanisms, and DAO organizational governance on composable and permissionless code. But all of this is the value foundation for believers, completely opposed to speculators who view DeFi as a casino chasing speculative profits.
Therefore, to date, the opposition between these two has severely hindered the development of the crypto ecosystem, failing to leverage DeFi's potential for full-chain asset management and global capital allocation to empower Web3 development.
In the real physical world, there also exists a contradiction between financial speculation and capital allocation. However, it is undeniable that in the physical world, the policy shifts of different dominant (government) powers lead to regional capital circulation barriers, causing a large amount of capital to wander in gray areas seeking higher capital efficiency. For example, the financial and technological positions of the United States mutually promote each other, with more efficient financial capital matching capabilities forging the strength of the U.S. technology industry, together forming a powerful economic system, which in turn gives rise to a developed financial industry.
Thus, in localized areas of the physical world, financial speculation and capital allocation ultimately achieve unity through effective capital circulation, pursuing higher efficiency. Information/digital civilization objectively creates the prerequisite conditions for transcending capital regional allocation, guiding humanity into cross-temporal and cross-spatial capital/resource/computing power allocation. If there are good practical examples, we can look forward to a scenario where DeFi players and Web3 Builders each find their place in this process, iterating on the financial, technological, and economic systems dominated by the U.S. in today's physical world civilization system, and even exceeding the original intention of Satoshi Nakamoto in the Bitcoin white paper to create peer-to-peer finance against dominant (financial) powers.
According to Watashi, the founder of SafeTreasury, the one-stop asset management and collaboration platform SafeTreasury will integrate DeFund, leveraging DeFund's full-chain asset management and global capital allocation capabilities, while also focusing on providing DAO/Web3 applications with tools for building user assets/rights and reputation/credibility as DID elements, promoting user collaboration and ecological co-construction in DAO/Web3 applications, and facilitating the collaborative development of SafeTreasury.
Attempting to empower Web3 with the functions of DeFi full-chain asset management and global capital allocation is a win-win situation.
For DeFi players, a significant constraining factor is the current limited total market of crypto assets and the trend-following nature of many altcoins with BTC and ETH fluctuations. There are attempts to tokenize and NFT physical world assets into DeFi protocols, but this largely depends on the proactive embrace of dominant (government) powers; otherwise, there will be regulatory risks.
Relatively speaking, during this round of bull and bear cycles, the practice of DeFi empowering Web3 has the opportunity to bring incremental markets to the native assets of the crypto world, and we can even look forward to the arrival of a crypto economic market supported by fundamentals in the future. Therefore, in response to the opening narrative, we can see heroes emerging in the crypto world!
Of course, leveraging the functions of DeFi full-chain asset management and global capital allocation to empower Web3 is not something that can be achieved overnight by one or two projects; there are many difficulties to face. But this is indeed an exciting practice and exploration. ThePrimediaDAO will continue to pay attention to this track, hoping that more DeFi protocols and Web3 applications can realize the opposition and unity of speculation and faith, maximizing the effectiveness of DeFi in cross-temporal allocation of capital/resources/computing power, and empowering the grand narrative of Web3 and the metaverse.
