If a person wants to borrow from compound’s pool, the current reasonable lending rate is expected to be 5% to 8% annually, but this is current, available for loan at any time, even in seconds. But users should pledge to the pool first. The money that can be lent is generally 23% – 64% of the pledged amount. At present, they can only accept high liquidity assets to pledge, such as eth, BTC, etc. In the 24 hours ahead, BTC has a volume of $110billion and eth of 80billion, comparable to any high liquidity asset in the world.
In the compound interest rate model, the annual interest rate of loan is affected by the following factors: base rate, utilization rate and multiplier.
Annual interest rate of loan = base rate + (use rate x plus interest rate).
Deposit annualized rate = annual loan rate X utilization rate X (1 – retention ratio)
The change of the renewal frequency utilization rate of deposit / loan interest rate will directly affect the loan interest rate and thus indirectly affect the deposit rate. Once the utilization rate changes, the compound rate will be updated immediately, and the minimum unit of the rate update is the time of a block generated by mining on Ethereum: an average of 15 seconds.
First, there are no funds in the compound pool. For example, 10 billion pools usually have one billion funds that are not used as risk reserves. The utilization rate refers to the proportion of actual loan out funds. For example, the 9billion funds in the pool mentioned above. If the money lent out is 0, the utilization rate is 0%. If 9billion are released, the utilization rate is 100%. When the utilization rate is 0%, the current basic interest rate is 2.8%. When the utilization rate is close to 100%, the loan and deposit interest rate will rise sharply, so as to restrain the loan demand of users and attract deposit users. This mode is set very well. When the market price of pledged goods fluctuates and reaches the closing line, it will not be like the traditional financial people calling you to ask for a replenishment, but will automatically complete the closing in time, pay back the deposit and interest first, and the balance will return to the lender’s account. As mentioned earlier, the pledged goods are highly liquid and easy to realize. If a loan causes the actual loss of bad debts, it is shared by all depositors, which is a bit like mutual insurance in the insurance industry. Some defi pools will also take 10% of the interest on each loan as bad debt reserve. This mechanism is very similar to that of traditional banks: mortgage loan, capital adequacy ratio, deposit deposit, national security system and provision for small depositors’ small deposits. However, real time and second-time automatic clearing and super high liquidity asset pledge are far better than traditional finance.
At present, there are not many types of pledge that can be accepted by the pledged loans, mainly in the mainstream currencies Eth and BTC, and some stable currencies. From the current current asset pool of compound, the top five types of pledge accounts for more than 90% of the scale.
The types of pledged goods in the future will be more abundant and diversified, but now, the traditional assets tokenization is not completed, and the pledged assets are all the original chain assets in the blockchain. After that, token bonds, high security stocks, such as China debt of virtue day, apple and Tencent, will also become one of the acceptable pledge products.
We can see that the ecological environment of defi is vigorous, so what are the problems with it? What are the differences compared with traditional finance?
I think it’s mainly the products that are currently developed by defi, mainly mortgage and spot trading. What is lacking compared with the traditional financial system is credit lending, leveraged trading and interest rate market. Because the defi can not be nominalized, there will be no credit market (the abandonment cost of an address is 0, which can not play the role of credit endorsement). But now defi has not been able to do leveraged transactions (similar to futures), so the exchange market and interest rate market are completely fragmented. I think the future prospects of defi will not be limited to anonymous transactions. With more and more KYC and more traditional finance involved, I believe that in the future, the regulated, restricted by financial regulations and at the same time, the defi that is KYC will come out (in this case, the credit lending and other markets will develop).
Many people say that the loan is usury when they hear about defi. I have to say objectively that the interest rate of defi is not high. I have been operating in the Chinese market. If anyone in China’s asset market says that you can lend you money immediately, the annual interest rate is only 7% – 8%. I believe that most private enterprises in China will find it reasonable. Even in Singapore, besides large enterprises, it is reasonable for small and medium-sized enterprises. Let alone Vietnam, India and other countries, annual interest rate of 7% to 8% of the loan is just a big pie. But defi has no borders. The interest rates of American, Chinese, Vietnamese and Indian people are the same, so I think the loan rate is reasonable. Of course, if big funds enter the field of defi lending in the future, it is possible to further lower interest rates, which I think will also be 5-8%.
Compared with traditional finance, defi has significant differences in the following two aspects:
The pledge rate of defi is very high, and the security is higher than that of traditional finance.
Liquidation automation: when the liquidation conditions are triggered, the completion of asset liquidation is in seconds instead of days, which greatly reduces the risk of the counterparty. No one in the field of defi calls to tell you that you need compensation. Everything is done automatically on the chain. Moreover, it is carried out in 15 seconds. The security of liquidation is much higher than that of traditional banks.
There are many pools in the process of borrowing and lending. I think we should choose pools with large deposit and long project operation time to participate in the project, rather than simply choose products with high interest rates.
For traditional financial institutions, these differences are not necessarily threats, and traditional financial institutions can also develop and benefit from the encrypted asset business:
Insurance company: create insurance products with the principal value of defi and broaden the source of the fund in the defi pool. I think the annual premium of insurance premium can even be charged higher. Because traditional financial institutions only have 0.1% annual income, defi can achieve 5%, and believe that users are willing to pay 1% of the insurance premium, even 1.5%, because in any case, users will get much more than 0.1% of the income from defi.
Commercial Banks: provide KYC deposit and deposit services for customers, and graft transaction services of blockchain; Relying on the principal insurance of defi, it is willing to make KYC’s compliant defi pool, and provide off balance sheet Asset Services for bank customers to deposit and borrow from defi. For example, 0.3% of the intermediate service charges for users who want to deposit are charged for docking with defi. I believe that users are willing to pay for this proportion of fees because users can get 4% of the revenue from the defi world. In addition, KYC, the source of fee for token transfer can be available for new users. I believe that the first banks that embrace defi will soon leave those traditional banks behind.
Investment bank: develop stolization of a large number of compliant financial assets, similar to secondary circulation service of traditional current financial assets in the blockchain financial world, obtain sto service fee, and help enrich the types of pledged assets of defi pool;
Exchange and retail securities companies: open transaction prices and match data to the defi prediction machine, help improve the liquidity of defi pledged assets and promote the prosperity of STO market;
Wholesale Bank (interbank): vigorously develop the interbank loan of blockchain financial institutions pledged by token;
Central bank: issue digital French currency and stable currency, vigorously promote KYC transaction and block chain common ID infrastructure.
We can take the interbank business of financial institutions in the blockchain as an example to further explore whether traditional financial institutions can develop encrypted asset business.
Genesis, the largest wholesale bank in the blockchain, has reached 3.8 billion US dollars. As of December 31st, 2020, the loan volume of all digital currency wholesale banks in the world is USD 10.6 billion, the pledge amount is US $14.7 billion, and the pledge rate is 72% (the pledge rate of retail business mentioned above is 24% – 64%), in this case, the current interest rate can reach 5.7%, which will be the business that traditional financial institutions like.
The latest refresh is that Genesis’s encrypted loans in the first quarter have increased significantly, with more than $20billion in new loans, compared with $7.6 billion in the fourth quarter of last year, while outstanding active loans increased to $9billion, an increase of 136.4 percent from $3.8 billion at the end of 2020. Since the loan service was launched in March 2018, the total loan amount has reached US $40billion, an increase of 94.8% year-on-year.
Part four: investment in crypto assets
BTC, Eth and other cryptocurrency are not currencies, because a system can only support several or dozens of transactions a minute, even if 1000 transactions are not able to act as payment currency! These cryptocurrencies, more precisely encrypted assets, are only names with a currency word.
First, we will look at two groups of data: 1) by October 2020, the global digital fund management scale is about US $25.1 billion; 2) As of April 23, 2021, the greyscale bitcoin trust has reached $35.3 billion. With the ETH fund, the light gray level is close to 50billion. The speed and scale of traditional funds entering the crypto asset market are amazing. So the rapid growth of crypto assets in recent months is amazing.
1. ETF fund products currently issued
We have counted ETF products that are currently on the market and found that they are all Canadian. Although Canada is relatively low-key, it should also be as open to encrypted assets as Singapore.
2. high current assets
The market value of bitcoin in april2020 was US $158.9 billion, while the market value of the Hong Kong Stock Exchange at that time was 4517.9 billion. So at that time, bitcoin’s market value was about 3.5% of the Hong Kong stock exchange. Bitcoin was equivalent to an asset. It could be understood as a stock. But its trading volume was the blue pillar, which was three times the exchange. The Hong Kong Stock Exchange has more than 1800 shares, with all trading volume, only 1/3 of bitcoin one stock.
Similarly, we see that eth had a market value of $51.9 billion at that time, and a 24-hour volume of $31.5 billion, and its liquidity was very high.
3. high amplitude
Bitcoin’s daily average price volatility in 2020 is 3.8 percent and eth is 5.27 percent. If you look at three years, bitcoin’s daily average amplitude is about 3.9 percent, ETH’s daily average is 6.5 percent, and stocks are far less than that. For example, in a one-year period, the Hang Seng Index shares’ daily average amplitude is 0.2%, and the Shanghai Stock Exchange is 0.2%, and Shenzhen Chengzhi is about 0.3%. If it comes to single stocks, like apple, apple is about 1.04 percent, Alibaba is 0.7 percent of the daily average. So we should be very careful about investing in digital currency.
4. bitcoin mining cost
When we discuss whether a currency should be bought, we should think that the price of a currency is affected by both sides of supply and demand. The market is very hot in the near future, and the demand is strong. Recently, the prices of BTC and eth should be brought up by the demand side, especially the entrance of institutional investors. But when the price of crypto assets plummetes, we should pay attention to the cost of the supply side. If the price deviates (below) too much, the miners in the market will stop mining.
For now, the cost of mining for each BTC is about $22000. As we can see from the following figure, due to the great increase in BTC price in recent period, the price of mining machines has also increased greatly. The main cost of bitcoin mining in the past (bear market) is power, accounting for about 60%, but now the cost of mining machine is the largest, accounting for about 53%. Therefore, this time point is not a good time to participate in mining investment. Bull market is the most expensive time to buy mining machines, and the best opportunity to participate in mining should be in bear market.
5. user growth
Now, there are 71680000 wallets holding bitcoin, 148million Ethereum and 65million coin safety intelligent chains.
If Facebook’s Diem succeeds, it can import a portion of the 2.7 billion Facebook users of traditional social media, such as 300million users, into blockchain wallets. Blockchain wallet is universal. If it is Libra’s blockchain wallet, it can receive, send, buy, sell bitcoin and Ethereum with a little technical adjustment. Therefore, the growth of user volume will undoubtedly bring the vigorous development of the whole network.
6. how much power does bitcoin system consume in a year?
Bitcoin consumes about 31.5 billion degrees of electricity a year, and the whole plant of the Three Gorges of the Yangtze River has about 100billion degrees of power generation per year, so it will consume about 0.3 of the Three Gorges. If considering the power generation by urban thermal power plants, a thermal power plant with a installed capacity of 3.6 million kilowatts is about the same, and 100% of the capacity can be met. More than 3 million kilowatts of thermal power plants are not large thermal power plants, so it is not an astronomical figure that people think, which makes the country poor. This is a rumor.
BTC, etc, the so-called mining, is that volunteers have undertaken the functions of bookkeeping, settlement and clearing of the whole system, and get the reward of the currency issued and issued automatically by the system for these effective work; In fact, all French currency, all securities transactions, have a huge accounting and settlement system and disaster recovery, and are also in power consumption every minute and every second; Moreover, BTC and eth mining generally consume so-called “garbage electricity” in the industrial and civil consumption markets with inconvenient transportation, rich energy and no energy around. Only these electricity are cheap. To transport these electric power to densely populated areas, the loss and line cost per thousand kilometers will reach 8 cents per kilowatt hour. For many years, the power consumption and transmission cost of BTC and eth are not available, There are profound reasons why those garbage electricity can not be transported out for the economic towns. Now it is mined by BTC and eth, used locally, and is it for global service and earning foreign exchange. Is it not very green and humane to some extent?
7. Talk about Ethereum
The price change of eth directly depends on the relationship between supply and demand. On the supply side, after Ethereum is converted to POS mechanism, the additional issuance rate of money is expected to be 1% from the current 4%. From the perspective of demand, more and more defi businesses need to mortgage eth, that is to say, the more applications of eth, the more it is mortgaged and locked. So logically, supply will gradually decrease, and its demand and lock-in will gradually increase. If we can also apply common financial knowledge in the field of blockchain, we can understand that supply and demand will be more and more tense. If you believe that defi will grow, ETH will certainly rise again.
As for the valuation of blockchain platforms including eth, we can actually use the traditional Internet VC valuation method. We will look at the number of apps (DAPP on the blockchain) on the platform, the total number of users on the platform and the growth rate brought by these dapps, and the activity of these users. Most importantly, blockchain is different from the Internet, First of all, we should attach great importance to the total amount of economic creation of the platform, that is, Gmv. The larger the platform (blockchain is generally called public chain), the more space it will have to share a small commission from Gmv in the future. For example, when we evaluate youtube, we will see how many anchors there are on the platform. When we evaluate wechat, we will certainly pay attention to how many wechat applets there are. So is Ethereum. We can evaluate eth by observing the total economic volume (Gmv) of the whole Ethereum network or data related to DAPP. At present, there are more than 2500 dapps on Ethereum. If eth is understood as an Internet platform company, there are now 2500 apps running on it. At present, the number of users is still small, but the growth should be very considerable.
8. Talk about BNB
In addition to eth, there is another coin that is similar, that is BNB. BNB can also be used to participate in defi. You can use similar logic to evaluate BNB.
BNB is the original token of coin an ecology and the embodiment of coin an ecological economic value, which can be divided into two parts: centralized exchange and decentralized coin an intelligent chain economic ecology.
As a result, the average daily trading volume of 51.1 billion US dollars is ranked first in the global exchanges;
There are more than 400 DAPP protocols in coin an intelligent chain, and about 34 billion US dollars worth of assets are locked in the chain.
In addition, the management of coin an has done a good job in the mechanism design of BNB, making BNB a deflationary encryption asset. The currency security central exchange will spend 20% of its profits on the destruction of BNB every quarter. In the first quarter of 2021, the exchange destroyed 1.1 million bnbs, worth about US $600 million. The total supply of BNB has been reduced from 200 million at the time of coin on-line to 169 million. At the same time, the destruction also reflected that the profit of coin security central exchange in the first quarter was about US $3 billion, and the net profit of coinbase in the same period was US $800 million.
If coinbase is the largest exchange in the world, then coin an is the largest exchange in the universe.
Finally, I would like to give you a pertinent suggestion. I hope you will not only be obsessed with currency speculation, but also pay close attention to the application of blockchain. There are still very broad application scenarios waiting to be developed.