Moderator: Alex, Research Partner at Mint Ventures
Guest: Mindao, founder of dForce
Recording time: 2024.12.12
Hello everyone, welcome to WEB3 Mint To Be initiated by Mint Ventures. Here, we continue to ask questions and think deeply, clarify facts, explore reality, and find consensus in the WEB3 world. We clarify the logic behind hot topics, provide insights that penetrate the events themselves, and introduce multiple perspectives.
This episode is the second episode of the "Current Status and Future of Web3 Track" series of podcasts. Let's talk about the present and future of Defi, the most mature track of Web3 business model. In the last episode, we talked about the topic of Crypto AI. In the subsequent series of programs, we will invite corresponding guests to talk about Meme, public chain, Depin, games & social, Payfi, and related topics of web3 policy.
Disclaimer: The content discussed in this podcast does not represent the views of the institutions where the guests work, and the projects mentioned do not constitute any investment advice.
Alex: In this podcast, we are going to talk about DeFi. We have invited Mr. Mindao, an OG in the DeFi field. He has participated in our podcast before and talked about AAVE and stablecoins. First, Mr. Mindao will say hello to our listeners.
Mindao: Hello everyone, I’m very happy to be here at Mint Ventures again today to talk about DeFi. It’s been a while since our last chat, and the entire DeFi track has changed a lot. I think I can take this opportunity to give you a summary and share some observations.
Understanding and interpretation of Defi
Alex: Okay, I'm looking forward to it. There are many friends in our program audience who have not officially entered this industry, and there are also many new friends who are interested in Web3. So the first topic we want to talk about is for those friends who have not officially entered this industry. Teacher Mindao actually started practicing in the field of DeFi a few years ago. If you have friends who are not very familiar with encryption or Web3, and they ask you what DeFi is, how would you introduce it in a language that they can understand?
Mindao: In fact, I face this problem every cycle, which is how to explain Bitcoin, Ethereum, and DeFi. Because Bitcoin has reached a new high at this point in time, many people who have entered the circle will ask me what DeFi is.
I think the good thing about this point is that many people have a concept of Bitcoin, which is a non-sovereign currency, or electronic gold, and a decentralized system. So now these friends ask me, if they know about Bitcoin itself, my simple explanation is: Bitcoin is a currency, we regard it as a decentralized currency, then DeFi is an expanded version of Bitcoin. In addition to currency, all the financial systems that we can access in traditional finance, such as transactions, payments, loans, and banking services, can actually be realized in the expanded DeFi field. You can think of it as an expanded version of Bitcoin, an application version of Bitcoin. This is what I am explaining to my friends now, and many of them can get it.
Of course, if you have no idea about Bitcoin, you may need to introduce it again from the perspective of decentralization and non-permission. But I think that if most people use this analogy, it is easy to get the essence of DeFi itself.
Alex: Yes, then they often add a question, that is, Bitcoin is understandable, it is an electronic gold, a non-sovereign asset, but most of our current traditional financial services seem to be quite convenient, what is the additional value provided by DeFi? If they ask this question, how do you think you can summarize it?
Mindao: Because I come from traditional finance, I think people who work in traditional finance also know that the current regulation of traditional finance is completely over-regulated, which is why it is so difficult to open a bank account now. There is a lot of debate in the United States now that many technology companies, especially some entrepreneurs in the crypto, have been so-called debanked and have no banking services at all. I think if we really compare it with 10 or 15 years ago, traditional financial services are becoming more and more difficult to use, the threshold is getting higher and higher, and the resistance is getting greater and greater.
So I think the biggest difference between DeFi and traditional finance TradeFi is that I think DeFi is essentially returning to the essence of finance, which is an information network. Our traditional finance completely fragments this information network. Different regulations in various countries, banks’ own supervision, and policy differences have led to the fact that information transmission is completely fragmented, and the resistance is particularly large. DeFi restores it, and finance is information. So whether you are doing transactions, issuing assets, or lending, it is returning to the transmission between information and information, without any obstacles, the so-called non-permission. This is also what I think is the biggest improvement of traditional finance in DeFi. As long as your information can return to a so-called transmission like the speed of light, when there is no obstacle to transmission, the capital efficiency is thousands of times higher than traditional finance.
And we are actually seeing this now. In DeFi applications, if you compare it with traditional finance, such as lending and banks, trading and exchanges, the US stock exchanges have holidays and are not open on weekends. You need to open accounts and get permission between countries. As an ordinary person, you can't trade US stocks, domestic stocks, and Russian stocks at the same time. But in DeFi, national boundaries no longer exist. So I actually think DeFi is to restore finance to an information theory perspective. It is information. So DeFi is to make information transmitted most efficiently, at the speed of light. But in traditional finance, you find that information is not the speed of light, and I even think it can't even reach the speed of sound, because it has checkpoints everywhere, checkpoints at national borders, checkpoints at regulatory agencies, and checkpoints between banks. So in terms of efficiency, in fact, returning to the most fundamental principle, DeFi must be many times higher than traditional finance.
Views on the current status of the Defi track
Alex: Got it. Let's talk about a more in-depth topic. In fact, DeFi has developed for more than two cycles to date. The last round of applications that really flourished was in 2020 and 2021, which we call the first year of DeFi, or DeFi Summer. A large number of new projects emerged, but in fact, very few of them have survived to this day. And judging from the current number, the number of innovative new projects in this round is far less than that in the previous round. Mr. Mindao, how would you evaluate the current overall status of the DeFi track?
Mindao: Actually, I think the entire DeFi track is very similar to the innovation in the technology field, especially the financial field. At the beginning, a hundred flowers bloomed and various narratives emerged. Because people have not yet recognized the narrative itself, during the DeFi Summer, new financial gameplays really came out every day. But you will find that after sufficient competition, a few tracks will settle down, which is what we call the verified track.
In fact, looking at these two cycles, I think the foundation of DeFi, we call it primitives, has not surpassed that of 2019. In 2019, we were just the first wave of DeFi. You can imagine that in 2019, there were Uniswap, MakerDAO, and Compound. Compound was the first to do pool lending. Aave was also called Etherlend at the time, which was a P2P lending. Its approach was wrong. Later, it copied Compound's approach and then rose. So at that time, the entire DeFi primitives were those three: stablecoins, AMMs, and lending.
Let's look back to the present. The foundation of the entire DeFi is still the same as these three. There are some variants on top, such as order books, concentrated liquidity, and AMM improvements. In addition to the current pool lending, there is also this kind of isolated pool lending, but in essence, I think it has not deviated from these three methods. So the current situation of the entire track is that I think there are two particularly interesting changes from the perspective of the two cycles.
One change is that DeFi has been commercialized on a large scale. Every new chain and every Layer2 that comes out has the three major components: stablecoins, lending, and AMM swaps. These three major components are commercialized on a large scale on every chain. Of course, a lot of them are copied from the codes of existing projects in the market, because they are open source. Uniswap and Aave both use these codes.
But at the same time, another interesting phenomenon is that while being commercialized, the concentration is also increasing. For example, Uniswap's spot trading share and Aave's share in the lending field, these concentrations are going up. So this actually reflects that in the DeFi track, I think commercialization and increased concentration are happening at the same time. In fact, there are still many new DeFi applications in the past few years. Of course, this is also based on the change in everyone's perception of DeFi. From the traditional so-called DeFi with decentralization as the core, to the current De-CeFi combined applications.
So I am not saying that there is no innovation. In fact, the track has been highly standardized at the basic primitive level, just the three major items, and these three major items are also very much commercialized, and the concentration is increasing. But at the subdivision level, some new DeFi applications and tracks have also emerged. I think this is a very interesting phenomenon that has emerged as the infrastructure has been built.
Alex: Yes, you just mentioned the three major items: stablecoins, lending, and AMM swaps. And derivatives, in fact, have been making a lot of products since the last round. What do you think of the category of derivatives? Is it suitable for DeFi? Are you optimistic about its subsequent development?
Mindao: This point may be related to another question, that is, what is the underlying logic of the evolution of the entire DeFi track. I have always mentioned the so-called first principle of DeFi in my previous sharing. What is the first principle? First of all, it must be in the place with the greatest resistance, and applications will appear first. For example, in the past, Ethereum Layer1, you can think that its main force of the medium is very large. Even if it is transmitted to Ethereum at the speed of light, because of its gas fee, its throughput is very small, so the DeFi that can occur on the Ethereum main network is limited, which is the first few we talked about.
For example, why did Aave fail to do P2P lending before, but succeeded with the pool model? It is because P2P lending, which has high gas and low throughput, cannot be used on the main chain at all. Its efficiency is too low, and the efficiency of individual matching is too low. Similarly, why does order book not work on the Ethereum mainnet? At that time, dYdX did order book on the mainnet, but later withdrew and went to StarkNet to do it. Now it has an appchain to do it. You will find that order book does not work on the Ethereum mainnet, but AMM works. In fact, I think the establishment of all DeFi applications follows a principle: from low-frequency applications, such as lending, such as AMM, its frequency is not that high, and stablecoins are also large-scale low-frequency transactions. Later, when the performance of layer2 or new layer1 comes out, you will find that medium-frequency and high-frequency applications begin to appear immediately.
Then we just talked about the perpetual part, the so-called perpetual part, why is it that centralized exchanges are doing it now, rather than doing it on the previous Ethereum mainnet? Because centralized exchanges are the place where the most high-frequency applications can come out, and perpetual can only be produced in this environment. But what we see is that it is interesting at this time that the new high-performance layer1 and high-performance layer2, as well as appchain, appear in these three tracks at the same time, what we call perpetual trading, and the scale is very large. For example, in Base, Synthetix Futures, and Arbitrum like GMX, and now Hyperliquid, which is very popular recently, it is doing Cosmos SDK like dYdX. You will find that the so-called perpetual application is actually a high-frequency application, and it must have a high-frequency infrastructure to support it.
This is why we see a lot of perpetuals coming out in this cycle. I think the perpetuals in this cycle may not be able to compete with centralized exchanges like Binance or OKX, because they still have many performance issues. But I think with layer1, including Hyperliquid, you can think of it as an appchain that is very close to the experience of centralized exchanges. With the emergence of this application chain, I think it is entirely possible for perpetuals to compete with centralized exchanges in the future. Of course, you can't make a one-to-one comparison here, and you don't need to. After all, one exists in a DeFi or non-permissioned model, and the other has KYC and other things, which is more like a centralized exchange model. But in terms of performance comparison, I think it may be infinitely close to the experience of centralized exchanges.
Defi’s potential and evolution
Alex: Actually, you just said that from 2019 to now, the three major components of DeFi or the most market-proven application types have not changed much. So many people say that the basic innovation of DeFi has actually been completed, and they think there may not be too many surprises in the future. It seems that we haven't seen such eye-catching products in this round as in the last round. But some people still think that the potential of DeFi is far from being released. What do you think of this view? If DeFi still has a lot of room for growth in the future, what do you think are its driving factors? How might it evolve?
Mindao: Actually, at the basic level, because the entire DeFi is based on the architecture of blockchain, it is block by block, so we see why there is not much innovation at the basic paradigm level. In essence, whether it is the Ethereum mainnet, layer2, or Solana, they still build the underlying infrastructure in a block-by-block mode. However, the change in the entire DeFi cycle and the previous two cycles is that people's understanding of DeFi has changed a lot. DeFi used to be called decentralized finance, but I think now people no longer regard decentralization as a core component.
More importantly, permissionless. In this cycle, I have seen relatively innovative projects, such as Pendle and Ethena. Pendle is an agreement for swapping fixed and floating interest rates, similar to a fixed income agreement. Ethena is a typical stablecoin for USDE. In fact, its strategy for stablecoins is what I have been doing since 2014 when we entered the crypto, which is the so-called basis point arbitrage. In terms of the entire trading strategy, the market has been doing it since the emergence of Bitcoin, which is nothing more than how to do basis arbitrage between spot and futures. Ethena turns this thing into a token, and then completely democratizes the so-called in-house strategy that was previously only used by some traders, and then allows the market to capture the so-called basic returns of the fluctuations of Bitcoin or other currencies in this market. If you ask people in the last few cycles, no one would think that Ethena is a DeFi project, because its entire infrastructure is added to centralized exchanges for arbitrage, and although the assets are managed, this management itself is not managed in the contract, but through a custodian. So from the architectural level, it is not DeFi. But from the perspective of tokenization, everyone can use their coins to mint it and swap their existing tokens, it is DeFi. So I think you can call it De-CeFI or Ce-DeFI. There are many applications like this in this cycle, such as some projects in the Bitcoin ecosystem and some projects in liquid-staking, many of which are similar to this path.
So I think we have actually greatly expanded the definition of the entire DeFi at this time, and then you will find that the TVL contribution of the entire DeFi that has emerged in the past cycle includes a large number of projects like liquid staking, such as Ethena, which I just mentioned, and projects on the chain such as RWA. In fact, for the entire DeFi revival, its entire TVL contribution accounts for a very large proportion. So I think the evolution of DeFi is the evolution of the entire concept, from the purest so-called decentralized finance in the past, to open finance, to now it is actually a hybrid, with centralization and decentralization mixed together. So from this perspective, I think the opportunities for subsequent subdivision may produce many very interesting combinations. Of course, if you are purely from the most primitive, at the fundamentalist DeFi level, there are really not many options.
Because in the past, for example, no one was working on the decentralized stablecoin track, or in other words, there were basically no projects working on the stablecoin track, especially the Ponzi stablecoin track of Degen. Unlike the DeFi Summer, when there were a lot of decentralized stablecoins with on-chain governance. So I think after the entire definition changed, you will find that many new applications have emerged in the DeFi track, and the TVL has grown very fast.
Limiting Factors of DeFi Development on Solana
Alex: Just now, Professor Mindao mentioned that the first thing is that the definition of DeFi has changed. Another thing that DeFi really provides is that the value has changed from so-called decentralization to permissionlessness, and then there is convenience, and everyone can reach it. I have always had a question before, that is, the Solana chain is actually very different from Ethereum in that Solana's nodes may be relatively few and more concentrated, and V God has been emphasizing that Ethereum's nodes are decentralized and have stronger anti-censorship. But now we are back to the user experience. Decentralization is not that important. In fact, in terms of accessibility, that is, technical availability, and experience, Solana is actually very good.
However, even in this cycle, we found that Solana's DeFi evolution did not resonate very well with the business data of its entire ecosystem. Whether it is the TVL of its DeFi, the stablecoins on the chain, or the TVL of some DeFi projects, it seems that they have not evolved very fast compared to Ethereum's business data. For chains like Solana, their DeFi is relatively slow to evolve. What do you think are the possible reasons or limiting factors?
Mindao: Actually, I think this is because everyone may have a big misunderstanding about DeFi, thinking that as long as a chain is fast enough, funds can be transferred to it immediately. Because we have been doing DeFi since 2019, I think DeFi is the same as all financial companies. The longer it runs, the greater its stickiness. The so-called stickiness of financial companies is actually a security threshold that is constantly increasing. For example, how do you test whether the DeFi of a system is strong enough? For example, Ethereum now has a TVL of nearly 200 billion US dollars on the entire DeFi system. This means that there is a bounty of 200 billion US dollars in the ecosystem, that is, funds are given to various hackers to attack. The TVL here is not out of thin air. It is because Ethereum has paid nearly tens of billions of dollars in losses in the past that such a high moat has appeared.
So why can't Solana migrate this thing over? In fact, the entire trust cost and security cost are very sticky. This is why the value of Ethereum lies in that as long as there is enough time to move forward, these TVLs are difficult to migrate. And I think there is another key issue. Because I have used new applications in these ecosystems, I think in terms of interactive experience, I don’t think chains like Base or Arbitrum will lose much to Solana. The Gas fee is actually lower than Solana, just use it on Base. What’s the only bad thing?
I think it is in the user's perception that Solana is just a chain, there is no layer 1, layer 2, there will be no so-called confusion. But Ethereum has too many, Arbitrum, OP, Base, Superchain, and so on. Conceptually, I think for retail investors, there may be such confusion when going to the market. Back to the question you just asked, why its TVL and DeFi cannot be migrated there so quickly, I think this network effect, including Solidity as a development language, first has the most complete tools, then has the most audit cases, and has the most components. In this regard, I think it is very difficult for a chain like Solana to completely copy it. And back to the most fundamental question is, why does Ethereum go to Layer 2 and what is the advantage of Layer 2 in competing with a single chain like Solana in the future? In fact, I think if more companies want to launch chains in the future, because you don’t expect that like Bank of America or JP Morgan, I will put all my financial infrastructure on Solana, and they will definitely launch a chain.
In this case, you will definitely choose a large public chain to support it, for example, you may build a Layer 2 on Ethereum. Under this premise, if you can find more TVL and combinatorial applications, from this point of view, it will be more difficult for Solana to leverage Ethereum's TVL. So you find that the network effects between TVLs are mutually restrained. It is not simply that if the currency of my chain rises, all the applications of my TVL will pass. Including an interesting phenomenon I have seen recently is USDT. USDT is now integrating all the coins of its chains and migrating a lot of USDT issuance rights of other Layer1 to the Ethereum mainnet.
In fact, it is also based on security considerations. So the so-called DeFi stickiness and security, I think other new Layer2s, no matter how good the experience is, it is difficult to pry this thing over in a short period of time, not to mention that on Ethereum, as I just said, there are actually many Layer2s that are not worse than these new Layer1s in terms of performance.
Advantages of MOVE language
Alex: I understand. As we see now, many public chains using the MOVE language, including some EVM-compatible Move L2, have already been released. Recently, Movement has just been listed on Binance. For the MOVE language, their value proposition is that using the MOVE language to build DeFi is safer than using the Solidity language for various financial services. As a developer and entrepreneur, do you think this advantage of the MOVE language is so attractive to developers?
Mindao: We have seen all these ecosystems, including Solana, whose team we have known for a long time. They all use Rust. In fact, many people may say that Rust is much better than Solidity in terms of expressiveness and can do many things. Not only MOVE, but many new public chains like Tezos have come up with their own new languages, and they also use various so-called formal verifications. But you will find that these new languages disappear very quickly. I think the core problem is that it is difficult to strictly say which language really has a great inherent advantage in terms of architecture. I think for a developer, the most critical thing is time, that is, your timing.
The sooner you use it, the more likely it is that all the problems that are expected to occur in Solidity have already been solved by our developers with real money. In this case, do you think it is more unsafe? At least from our development perspective, I don't see it that way. Because it has enough cases, enough tool support, enough automated auditing, enough audit companies to cover it, and enough hackers. For example, it's very simple. If I issue a bounty, there may be tens of thousands of white hat hackers who can do it in the Solidity ecosystem, but there may be only a few hundred or a few thousand in the MOVE and Solana ecosystems.
So I think security itself is a variable, there is no such thing as an absolutely safe language. The biggest problem is how new languages can build their own moats in the future. If there is not enough potential energy to start, it will eventually enter a state like burning wood, the wood is wet and will never reach the ignition point. In this case, its own security may not be a certain thing, unlike Solidity, which has enough cases to verify it. So I don’t think there is an absolute advantage or disadvantage in the language itself. On the contrary, I think it is very difficult for a language to be replaced if it reaches a network effect. This is why we have seen that Monad wants to use EVM for compatibility with Solana’s high-performance underlying architecture. You can see that there are many new infrastructures for Layer1 that come from that route, such as how to make some new and higher-performance public chain infrastructures, such as EVM compatible with this execution environment, or to create a new public chain. There are actually many projects on this route now.
The impact of political changes in the United States on the crypto space
Alex: I understand. Like Monad you just mentioned, including Movement, they seem to be in this direction. Then this year, there was actually a big policy change. Starting from November, Trump won the presidency and the Republican Party also won the majority of seats in both the Senate and the House. In particular, the United States seems to have greatly changed its expectations for the development of the crypto industry. Recently, the Fifth Circuit Court of the United States ruled that the previous OFAC sanctions on Tornado Cash were illegal. What do you think about the impact of the current political changes in the United States on DeFi and even the entire crypto field? What are the optimistic parts and what are the possible pessimistic risk factors?
Mindao: I think from an optimistic perspective, it has exceeded my most optimistic expectations. I didn't expect it to be so fierce, that is, the Trump bull market, Trump's children directly entered the market to do DeFi projects. I think the entire Crypto has penetrated the Trump administration from family members, such as Donald Trump Jr., whose children have done DeFi projects, and Baron because another child, who is still studying, is also in the Defi NFT field. I think it may have a particularly large impact on Trump's core circle. In addition, Vance, not to mention David Sacks, are all infiltrated by people from the PayPal mafia. So you can see that in the circle of roles that Trump can involve, basically all are Pro Crypto people. So I think at the political level, there is no doubt that it is more optimistic than I expected, and I think it may be too optimistic. This is what I am more worried about, including whether Bitcoin will be included in the US reserves.
From an optimistic perspective, I think there is indeed no ceiling for this cycle. On the contrary, this optimism itself may break the so-called 4-year cycle of the previous crypto. I think there is a high probability that a regulatory framework will be issued at the legislative level that is completely aimed at Crypto, rather than forcibly incorporating Crypto into the so-called security law system for regulation like the current SEC. I think there may be a completely independent regulatory system. If this happens, I think it may not only be DeFi, but also the development of the entire Web3 is very optimistic. From a pessimistic perspective, it is actually very clear now that cryptocurrency itself is no longer a so-called non-partisan political issue. I think it has become a question of party alignment.
This is what I am more worried about. After the election, the Republicans and Democrats have formed a front in Crypto and Against Crypto. I think cryptocurrency has now become a divisive issue in the two-party politics. What if the Republican Party cannot get ahead after Trump's four years? Will these policies be changed again? This is a topic that is difficult to return to neutral now. It is a core issue of the Republicans and Democrats.
Alex: Yes, Trump may not last until the fourth year, but may wait until the mid-term elections in 26 years. It will be a challenge whether the Republican Party can win so many seats in Congress.
Mindao: Yes, but I think the good thing is that the entire operation this time, not only Trump's coming to power, but also the lobby of the Senate and the House of Representatives, actually the American political arena has already been a little awed by the entire Crypto Lobby. I don't necessarily mean this a compliment, it may be a derogatory word, that is, I think the impact is too great. In particular, the several lobby teams supported by Ripple's organization have an 85% winning rate in the election of the US Senate. The senators he backed, these Crypto Senators, have an 85% winning rate of 100 people, which is a very high winning rate. So this is actually quite scary, which means that all these people against crypto may not have the opportunity to enter the US legislative agreement in the future. From this point of view, I think it may also trigger some counterattacks from people such as the Democratic Party or Anti Crypto.
Alex: Yes, I see that Fair Shake is already preparing for the 2026 midterm elections and has raised tens of millions of dollars in advance.
Mindao: Yes, of course this is a good thing. Not only from the administrative level, but also from the legislative level, it has penetrated very deeply.
Speculations on the process of Bitcoin entering national finance
Alex: From your current observation, one of the most concerned narratives about this cycle is the process of Bitcoin entering the national treasury. Now, not only at the national level, but also at the state level, Bitcoin preparation bills are being enacted. I see that the faster states like Pennsylvania and California have already submitted legislation at the House level. Are you optimistic about whether it can be legislated at the national level in the next four years?
Mindao: I think it may not be that easy to legislate at the US level. If it is at the state level, I think it is easier to do, because the scope of finance that can be controlled at the state level is relatively small. If it is put at the national level, I think it may be difficult. One of the reasons is that I think there is still a very strong faction in the United States. Although Bitcoin is now called electronic gold, many people still regard it as a non-sovereign currency. This positioning itself, I think the most fundamental is to fight against the so-called debasement of legal currency, the so-called depreciation of legal currency. So from the fundamental purpose, it is in conflict with the desire of most Americans to regard the United States as the only international reserve.
In fact, many people in the US political arena hold this view. They believe that although Bitcoin is called electronic gold and competes with gold, they believe that it will eventually compete with the US dollar. And it is indeed competing with all legal currencies, because the debase of legal currencies gives Bitcoin room to grow. So in this regard, I think the resistance is still quite large. Of course, this depends on how much political conviction Trump has to push this forward, it is hard to say. According to his style, he may really push it very hard. But this does not mean that the US president can just push it, it still needs to be passed at the legislative level.
Alex: Yes, I agree with the point you just made, because in fact, I have seen many countries sanctioned by the United States, including Russia and Iran, now regard Bitcoin as a potential option for national reserves, and their imaginary enemy is the US dollar, which means that it is better to use Bitcoin as a reserve. This will indeed challenge the status of the US dollar as a basic reserve asset.
Mindao: Yes, so now everyone actually defines Bitcoin as electronic gold, which is actually a very pleasing strategy. Let's say we are competing with gold, first increase it to 13 trillion or 15 trillion, and then we will compete with gold. Now no one mentions competing with the US dollar, but I think the bottom line is still the same. You want to talk about gold, but you are electronic gold, which can be divided infinitely, so what is the difference between it and currency? There is no difference. But the crypto is not willing to put this issue on a particularly important level. But I think the US Treasury Department or the financial circle also understands these things very well.
The possibility of large companies purchasing Defi projects
Alex: Let's talk about a topic that focuses more on DeFi. Now we have Bitcoin ETFs and Ethereum ETFs. It is no longer a big news for listed companies or even government finances to hold BTC. It is normal for most companies to buy Bitcoin. In your opinion, as the crypto industry becomes more compliant in the United States, will they consider taking some blue-chip projects in DeFi, such as Aave and Uni, as a merger or acquisition of these traditional financial companies, or at least a potential equity investment target? Do you think this is likely to happen in the next one to two years?
Mindao: This is also a very interesting topic. We now see that the relationship between Bitcoin ETF and Wall Street or traditional finance is that they only regard it as another trading asset, such as electronic gold. In fact, it is still separated from traditional finance, that is, it is only regarded as part of AUM, part of the asset management scope, and I will give it to the user if he wants it. But I think there have been several interesting changes in this cycle. One is that, in addition to the two completely independent entities we just talked about, there is actually no difference between Bitcoin and gold. My company Blackrock also provides different products to my users, and the others are actually not related to Blackrock itself. But Bitcoin and MicroStrategy are more interesting. MicroStrategy is also a traditional company. It is a software company, but now it is a financial company. You can think of it that way, right? But its relationship with Bitcoin is actually the relationship between ETF and Blackrock we talked about earlier. They are completely independent entities. Now Bitcoin and MicroStrategy are twin relationships. Why are they twin relationships? The key point connecting the two twin brothers here is volatility.
The volatility of Bitcoin and the volatility of MicroStrategy's stocks are connected. Bitcoin fluctuates, and its stock fluctuates. Its stock volatility will in turn affect Bitcoin's volatility. So I think this is a particularly interesting phenomenon, that is, a dual-token mechanism has been established between Bitcoin and US listed companies, one of which is Bitcoin and the other is the stock of a listed company, just like we play this kind of dual token in DeFi, with the sub-token and the parent coin being linked to each other's economic model.
What is particularly interesting is that Bitcoin and MicroStrategy form a dual-token mechanism to some extent, which is to establish a connection between the volatility of traditional stocks and Bitcoin. So back to the level of DeFi, if Blackrock buys Aave and Uniswap tokens, I don’t think this is sexy enough. I predict that in the next three to five years, there will be a twin relationship between DeFi and listed companies similar to the twin relationship between Bitcoin and MicroStrategy. What does it mean? It means that a DeFi protocol controls a listed company. This listed company may be a bank, may do lending, and can do banking. It can open a fiat currency channel to Aave, or a listed exchange can directly call its fiat currency to a DeFi on a chain. This is what I really think is likely to form these two twin currencies between DeFi and Wall Street companies. I think this is what is really likely to happen in the next cycle. Because now we see that in addition to MicroStrategy, including Marathon, there are also many mining machine companies that have started to buy Bitcoin. Using the MicroStrategy strategy actually means that its stock is not only related to the difficulty of Bitcoin's computing power, but is actually correlated with the price of Bitcoin.
So I think the greater possibility and more interesting point of DeFi in the future is what we call "listed companies first, then DeFi". Your listed company can be another channel for my DeFi to issue bonds, do equity financing, and do things like bank licenses, and then connect these two worlds. I think according to Trump's way of playing, for example, the World Liberty DeFi he is doing now, the next step may be to issue stablecoins, and the next step is whether he will also get a bank license, and whether it is possible to install it in his own listed company. This is completely possible. I really think it may happen in the next three to five years, during the cycle when he takes office. Of course, in addition to him, traditional DeFi projects may also be able to make some attempts in that direction. I think this is more interesting, that is, how to really establish a relationship between "coins" and "stocks" in the economic model in terms of mechanism. Your DeFi makes money, my stock shareholders will benefit, and then the expansion of my stock balance sheet will also help my DeFi to obtain more traditional funds. I think this is a more interesting combination.
Alex: This view is indeed something I have never heard of before, and it feels very novel and imaginative. Previously, there were stock versions of BTC and MicroStrategy, and later there were DeFi versions of listed companies. I think this is really interesting. Let's go back to the views of those large financial institutions on DeFi. They may now be more like what you said, configuring a Bitcoin channel so that their customers can buy it, and they are more of an asset management. Do you think it is likely that they will go out and do DeFi-related financial applications, such as making a possibly better version of Aave, and do such business? For example, like BlackRock or some other financial institutions.
Mindao: In fact, we see that traditional banks like JPMorgan Chase have their own blockchain system. Of course, this is not connected to the public chain. The most used one is for foreign exchange settlement. You can think that its entire model is not much different from Curve's model, or in the Uniswap pool, there is not much difference. But this type of application is actually more about inter-bank settlement, and I think this is the first step he may take. Then the next step is how to push it to the public chain and use the public chain's infrastructure to do it. This also goes back to what we said earlier. In fact, I think the entire public chain competition, such as Solana's single chain model, or our Ethereum multi-layer model, the most critical point is how these financial companies will access the public chain in the future. If he wants to do it in a controllable way, he must issue a layer2 or layer3 himself, and then connect to the public network. So I think if he wants to enter DeFi in the future, it must be controllable, that is, in a permission chain. I think it may be very similar to the current model of Coinbase and Kraken, but it will be more conservative than them. That was the core of how I felt they played down the stretch, they were more conservative than they were.
After all, Coinbase is still a company in the crypto. But you will find that Coinbase is actually more conservative than Binance. When Binance was doing BSC, many of its gameplays were actually more radical than Coinbase. Why is it radical? Because Binance may have some DeFi projects of its own, which may be incubated or done by itself, but Coinbase basically does not really want to incubate such projects. So I think if financial institutions enter the market in the future, they will most likely be similar to Coinbase and Kraken. They will deploy a layer2 and then build some DeFi components. And they will most likely use some open source codes like Uniswap. It's just that they may add their permissions, access, whitelists and other things to their entire logic. I think it is likely to unfold in this way.
Alex: I understand. In fact, Coinbase and Kraken have all chosen OP's stack without exception, and have basically entered the Superchain ecosystem. From what you said earlier, I think that if such large financial institutions want to build their own chains, they are more likely to choose the Ethereum ecosystem, right?
Mindao: Yes, I think that in fact, regarding the performance of the chain you mentioned, the performance of Ethereum's current Layer 2, including the performance after future improvements, I think it can fully meet the needs of these financial institutions. The most critical point is that I think the strategies of Ethereum Layer 2, including the two Layer 2s of OP and Arbitrum, are very different. For example, OP has now built a lot of Layer 2 Superchain ecosystems, and in the end, it may be necessary to solve how to combine the liquidity between Layer 2s, that is, to have inter-chain communication, so that transactions can be completed in Layer 2 of different Superchains in one transaction, solving the so-called current Layer 2 split liquidity problem. I think that after this problem is solved, it will bring another network effect, and more people will be willing to join in, and the network effect of liquidity will be particularly strong.
Another thing is that it may be difficult for others to leave the network. This is why I am not worried about whether Coinbase will independently develop Layer 1. As long as there are enough chains, the liquidity and network effects between chains are established, it is not that easy to leave it. If you leave and become an isolated Layer 1, it may not have better value than in the modern Layer 2 architecture.
Impressive projects and evaluation criteria
Alex: I think this is the most in-depth and insightful view I have heard recently about the moat of Ethereum ecosystem compared to SOL. You just mentioned that we have seen some new products in this round. So in the past year, which products have left a deep impression on you, whether it is the new development of old projects or the emergence of new projects.
Mindao: I mentioned two new projects, Pendle and Ethena. In fact, I think the Pendle model is quite bumpy, because at the beginning they came out to make so-called fixed and floating interest rate products, and I looked at it at that time. Because I came from traditional finance, I think its particularly bad design is that it has an expiration date. I have always had a very big prejudice. I think that making products with expiration dates in DeFi is basically a dead end and will definitely not work. Including many options trading or futures trading options products with expiration dates before, basically none of them took off later. So when they came out to make such so-called fixed income products with expiration dates, I didn’t look at it at that time. I think this doesn’t seem to be very valid in Crypto. But this time, after the LSD, Restaking protocol came out, I think they really found this very niche market. At least at this stage, a large number of these pledge agreements and re-pledge agreements have indeed introduced two groups of gamers. One is the big players who are interested in fixed income and don’t want to bet on the rise and fall of Utoken or the number of points. In addition, it satisfies the speculative needs of some retail investors or those who are looking to make money from it. I think it is a good combination of these two groups. I think in this regard, at least at this stage, they have indeed found the market demand. So I think there are many DeFi narratives that we may easily deny when we first look at them.
Of course, I don’t think that Pendle’s model is the final model. I think that whether it is interest rate swaps or fixed income products, there may still be a perpetual type in the end, such as the separation of fixed income and variable income in perpetual products. It is a bit like a perpetual contract, where everyone can trade all the time, instead of having to roll my position again after expiration. I think it is possible that Pendle is also doing something new. I think this track really seems to have found a very important application of what he calls product market fit in this cycle. In addition, Ethena, I think it has turned a trading strategy that we are accustomed to into something that the general public can use, and now it has grown to a position of 5 billion US dollars. I think it is indeed tokenizing the entire income market. From the token level and from the accessibility of retail investors, what they are doing now is the best. And now we see that after their product came out, all exchanges are doing it, including Binance, which has also launched FDUSD, and I see that the interest rates in their lending markets are actually basically anchored to the basic returns of this rate arbitrage. So in fact, exchanges are also learning this strategy. So I think these two products have really found a good foothold in terms of innovation in this cycle. In addition, the on-chain of national debt is actually completely different from what we see in DeFi in this cycle compared to DeFi summer.
During the DeFi summer, everyone really relied on subsidies, and there was no so-called real yield. But we see that in this cycle, MakerDAO now relies on the income of the underlying treasury bonds to conduct a large amount of income. This point also goes back to what we said earlier. Is this thing called DeFi? According to the traditional definition, it is not called DeFi. But in this cycle, what we call the combination of De-CeFi appears. For example, we just talked about Ethena, all of its positions are in centralized exchanges, and all of MakerDAO's treasury bonds are managed by offline trusts, which are also very centralized in theory. But you find that this so-called combination of centralization and semi-centralization actually solves many real yield problems, because these are all real yield, one from the leveraged market, and the other from the income of US treasury bonds, and then through the distribution of this real yield through DeFi, users can get it. So I think the evolution of the entire DeFi, we see from the pure so-called fundamentalist definition to the current more pragmatic hybrid, is also a very interesting point in this cycle. In addition, a phenomenon that has emerged in the past year or so is that we used to see that DeFi all had coins and must issue coins. We now see that Polymarket and Pump.fun have very strong so-called income demand even before they issue tokens. What trend does this indicate? It is that without a good infrastructure, applications like Polymarket and Pump.fun cannot come out. Both applications rely on a good infrastructure, Polymarket is based on Polygon, and Pump.fun is based on Solana. So we can see that as the performance of what we call Layer 2 and new strategies gets better and better, there will be a lot of DeFi applications that do not need tokens, or may not need tokens at all, but at the same time provide enough use value. This is particularly obvious to us now.
Back to what I just said, I said that the first principle of DeFi is that as the performance gets better and better, some applications that need to rely on this high-performance chain will emerge, such as the Polymarket and Pump.fun we just mentioned are typical applications of this type. I think there may be a lot of this in the future. Including now we see a lot of Trading Bots that don’t have coins, but Trading Bots are very profitable. Like Pump.fun, it can make 1 million or 2 million US dollars a week. I think this is very different from the previous two cycles we talked about. In the previous two cycles, if there was no token, it was basically difficult to start a project. But now we see a lot of this type of application, which actually does not need tokens at all, and has found its market demand.
Alex: As an investor, when you invest in a DeFi project, which dimensions will you focus on? Or what do you think are the moats of typical DeFi projects?
Mindao: I think it depends on the length of the investment cycle. If we only look at the cycle of one or two years, it may be narrative driven, that is, narrative driven will be more, such as investing in some popular DeFi projects with some mechanisms. But from my perspective, I look at longer cycles, that is, cross-cycles. If we look at it from a long-term perspective, we need projects that can really survive for several cycles. In the past, I thought the community was very important, and it seemed that there must be a strong community drive, but now I find that the community may not be the most critical for DeFi projects. Because we now see that the DeFi projects with the highest valuations and the highest moats may not have much to do with the community. For example, Uniswap now has a market value of tens of billions of US dollars. Uniswap has a large number of users, but it is difficult to say that it has a community. AAVE is different. AAVE has a certain community, and you can see the discussion in the forum. But I think Uniswap, including AAVE and Maker, has two major moats in the end. One is of course continuous innovation, and each time it is an innovation that goes further than the cycle.
Another key point is that their brand is very strong. Now anyone can fork Uniswap, V1 V2 V3, and fork it up. I think that in the current market value of Uniswap, 60% to 70% is brought by its brand. And this is something that others cannot fork away, and I think these projects have basically achieved it. Of course, in DeFi, if you want to have a brand, it depends on two things. One is the continuous innovation I just mentioned. But you may not be the first to innovate. For example, AAVE is not the first innovation, but it has been doing it from 2019 to now, while Compound has not done it. The founder of Compound has now gone out to work on other projects. After the real DAO, Compound has very little innovation now, but AAVE is actually still innovating in every cycle. Another is DeFi. I think the core is security. Uniswap has never had a security incident, while Compound, Maker and AAVE have all had it, but at least these security incidents did not stop them from getting up.
So I think when these two points are achieved, its brand value will be continuously strengthened with each cycle. I think this is its biggest moat. It is difficult to see other projects below, and the projects with increasing concentration are all projects with very high brand recognition.
Principles for configuring Defi projects
Alex: In terms of your specific secondary asset allocation, in addition to BTC and Ethereum, are some of the so-called blue-chip options, such as DeFi, especially some leading projects, included in your investment allocation list? Let's talk about the long cycle.
Mindao: I basically don’t have any. The fundamental reason why I don’t have any is that we are already doing DeFi and have invested time and energy in this setup. So this may be a big difference between me and other investors, that is, we don’t need to double this thing, and we will have more configuration in the public chain.
Alex: I understand. If an ordinary Web3 investor has BTC, Ethereum, and some public chain tokens in his portfolio, do you think projects like DeFi should become part of the investment of most ordinary investors?
Mindao: Actually, I have shared before that I think the investment portfolio is very important in investment. For example, when I entered the crypto in 2013, I said at that time that in addition to Bitcoin, 30% of my investment portfolio was invested in some random projects, which must be non-Bitcoin projects. I invested a lot at that time. In 2014, I invested in Ethereum's ICO, and I bet on Ethereum. In addition to Ethereum's ICO, there were many other ICOs, about three or four at that time. At that time, there were very few ICOs, especially in 2013 and 2014. There were probably a few ICOs a year, and I basically invested in every one of them, of course, the allocation ratio was different. I think if you are a retail investor, the construction of the investment portfolio is the most critical, and you can't all in Bitcoin and Ethereum.
Of course, I am talking about really relying on this coin to turn things around, not just to double it. If you want to turn things around, I think the first thing you can do is not to go all in on mainstream coins. For example, some radical people go all in on Altcoin. I know there are people around me who have lost 100%. If his ability to make money is strong enough, he can allocate funds and doesn't mind losing money, then I think this strategy is not wrong. Just go all in, even into meme coins and degen coins, I think there is no problem with this.
If I am building an investment, I think at least 30% of it will be invested in so-called alternatives, that is, in addition to mainstream coins. DeFi is definitely a track worth investing in. In addition to DeFi, I don’t know what other types of applications in Crypto have real value capture. Now all the so-called real yield and real income are DeFi applications. So in this regard, I think if you really don’t consider mainstream coins, but only consider Altcoin, DeFi must account for a large proportion, I think at least 50%. Then the remaining 50% may be supplemented with some Degen coins, memes or other types of tracks.
Alex: Okay, thank you very much to Mr. Mindao for sharing with us today. I welcome Mr. Mindao to share more of his insights and opinions on DeFi and Crypto. Thank you for your time.
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