Web3 Mint To Be: The Current Status and Future of Decentralized Finance Track

Host: Alex, Research Partner

Guest: Min Dao, founder of the Decentralized Finance project

This episode is the second in the "Current Status and Future of the Web3 Track" podcast series, focusing on the present and future of DeFi, the most mature track of the Web3 business model.

Alex: In this episode, we have invited Mr. Mindao, a seasoned practitioner in the field of Decentralized Finance. Mr. Mindao, could you please explain what DeFi is in simple and easy-to-understand language for those friends who are not very familiar with crypto or Web3?

Minda: My simple statement now is: Bitcoin is a decentralized currency, and DeFi is an extended version based on this. In addition to currency, services that can be accessed in traditional finance, such as trading, payment, lending, and banking services, can all be realized in the DeFi field. It can be considered an application version of Bitcoin.

Alex: So what is the additional value that DeFi provides compared to traditional financial services?

Minda: Decentralized Finance restores finance to the perspective of information theory, allowing information to be transmitted with the highest efficiency. In traditional finance, the transmission of information is fragmented and hindered by various factors such as regulation and national borders. DeFi eliminates these barriers and achieves unobstructed transmission of information, with capital efficiency thousands of times higher than that of traditional finance.

Alex: The DeFi sector has developed over two cycles to date. How do you evaluate the current overall state of the DeFi space?

Mindaos: From these two cycles, there are now two particularly interesting changes. One is that Decentralized Finance has been heavily commoditized; every new public chain or Layer 2 that emerges will have the three fundamental components of stablecoins, lending, and AMM swaps. At the same time, another phenomenon is that concentration is also increasing, such as the market share of Uniswap in spot trading and Aave in the lending sector, both of which are on the rise. Therefore, commoditization and increasing concentration are happening simultaneously.

In addition, there are now many applications that combine De-CeFi with the traditional decentralized core of Decentralized Finance (DeFi). On a more granular level, some new DeFi applications and sectors have also emerged. This is an interesting phenomenon that has appeared following the improvement of infrastructure.

Alex: There have been many products in the derivatives category since the last round. What is your view on this category? Is it suitable to be done in a DeFi way? Do you have confidence in its subsequent development?

Minda: Derivatives are indeed a hot area in this cycle. I believe the evolution of Decentralized Finance follows a principle: starting from low-frequency applications, such as lending, AMM, etc., and later, with the emergence of better-performing Layer 2 or new Layer 1, medium-frequency and high-frequency applications also begin to appear. Perpetual contracts emerged in this environment.

We see projects like Synthetix Futures on Base, GMX on Arbitrum, and the recently popular Hyperliquid, all of which are focused on perpetual contracts. These projects may still not be able to compete with centralized exchanges like Binance or OKX due to some performance issues. However, with the development of Layer 1 and application chains, it is entirely possible that projects capable of competing with centralized exchanges will emerge in the field of perpetual contracts in the future.

Alex: There is a view that the foundational innovations of Decentralized Finance have already been completed, and there may not be many surprises in the future. However, others believe that the potential of Decentralized Finance is far from being fully realized. What are your thoughts on this? If there is still significant growth potential for Decentralized Finance in the future, what do you think the driving factors are? In what ways might it evolve?

Mindaos: I believe that the definition and understanding of Decentralized Finance have changed significantly. Previously, DeFi referred to decentralized finance, but now the focus is more on permissionless features. This cycle has seen some interesting innovations, such as Pendle and Ethena. Pendle engages in fixed and floating rate swaps, while Ethena tokenizes traditional basis arbitrage strategies. Although these projects do not conform to the traditional definition of DeFi, they have identified market demand.

We see the evolution of DeFi as transitioning from a purely decentralized definition to a more pragmatic hybrid. Another interesting phenomenon is that projects like Polymarket and Pump.fun have strong revenues without issuing tokens. This indicates that with the improvement of infrastructure, more DeFi applications that do not require tokens but provide sufficient utility value will emerge.

Alex: As an investor, what dimensions do you focus on when evaluating DeFi projects? What do you think are the competitive advantages of typical DeFi projects?

Minda: In the long run, projects that can survive across cycles are more valuable. I believe that the two important moats of DeFi projects are continuous innovation and brand effect. Taking Uniswap as an example, possibly 60%-70% of its market value comes from brand value, which cannot be replicated by others. To build a brand, in addition to continuous innovation, security is also crucial. For instance, Uniswap has never experienced a security incident, while other projects that have faced security events have not been affected in their development. With the development of each cycle, the brand value of these projects continues to strengthen, becoming the largest moat.

Alex: Do you think DeFi projects should be a part of their investment portfolio for regular Web3 investors?

Minda: I believe that the construction of an investment portfolio is crucial. For investors looking to achieve wealth growth through cryptocurrencies, they should not invest entirely in mainstream coins. I recommend that at least 30% of their investments be in projects outside of mainstream coins. In this portion of the investment, DeFi should occupy a significant proportion, as currently, the main applications that can generate actual returns in the cryptocurrency space are primarily DeFi applications. If only considering investments in non-mainstream coins, I suggest that DeFi accounts for at least 50% or more, with the remainder allocated to some high-risk projects or other sectors.

Alex: Thank you very much, Teacher Mindao, for today's in-depth sharing. I look forward to having the opportunity to continue hearing your insights on Decentralized Finance and cryptocurrency topics in the future.