DeFi: The revolution eats its children

Decentralized Finance (DeFi) is rightly the big crypto trend last year and also this year. The decentralization of finance is challenging traditional exchanges and other financial services providers – but its exteme momentum is also making its own players sweat. Nothing demonstrates this better than the neck-and-neck race between two decentralized exchanges.

Yes, I admit it: I’m excited about DeFi. And I think anyone who is serious about Bitcoin, about decentralization, and about financial autonomy must share that enthusiasm. Bitcoin has decentralized money – DeFi essential parts of finance. Bitcoin replaces the central bank – DeFi replaces the banks. If you, dear readers, haven’t tried DeFi apps yet – do it. It’s terrific, and probably no words on this blog can replace that experience. There are also services like BlockFi that are centralized but carry different risks to decentralized finance (DeFi).

What many overlook in the hype: There’s a “permanent revolution” happening at DeFi. This is an actual Marxist concept, perhaps inspired by Pierre Vergniaud, a leader of the Girondists during the French Revolution, who forged a beautiful phrase even as his head lay on the scaffold: “Revolution is like Saturn, it eats its own children.”

Among Marxists, the “revolution in permanence” was considered necessary to eliminate the bourgeois-capitalist order and arrive in the paradise of communism. For DeFi, it is more likely to be the consequence of a revolutionary movement moving toward the complete decentralization of finance and flattening everything in its path.

If you had to pick one DeFi dapp worth talking about, it would be Uniswap. The decentralized exchange (DEX) is a prime example of how you can not only map an exchange through a smart contract – but that exchange can also reach a size that should make any responsible manager of centralized exchanges lose sleep.

In the last few days, trading volume has been almost consistently more than $1.5 billion – a day! The record of 2.2 billion dollars on October 26th remains unmatched, but it looks like Uniswap will break the weekly record of almost 10 billion dollars. On an annual basis, that would equate to $540 billion, or 440 billion euros.

What defi applications do you use?

defi applicationsBy comparison, the most important German stock exchange, Xetra, had a trading volume of 1700 billion euros in 2020, covering 75 percent of German securities trading. Thus, Uniswap makes about a quarter of the turnover of Xetra.

The decentralized stock exchange is eating up the traditional stock exchanges. The pace is impressive. Weekly trading volume on Uniswap. Another comparison would be Coinbase. The US exchange is one of the largest centralized crypto exchanges. After issuing shares recently, it achieved a market value almost three times that of the Frankfurt Stock Exchange (which is behind Xetra). Yesterday, Coinbase reached a trading volume of $3.5 billion. That’s about three times that of Uniswap. So there’s still a head start – but it’s getting so small that the DEX should worry even Coinbase managers.

Coinbase is a child of the crypo revolution. This has allowed new, all-digital exchanges to compete against the old, paper-based exchanges. Coinbase is proving just how transformative this is, with a market value higher than Deutsche Börse. But now Coinbase itself is in danger of being eaten – by decentralized exchanges like Uniswap. Just as in some spider species the newly hatched offspring eats the mother, the decentralized exchanges are the first to threaten those central platforms that became the basis for making DEXs possible in the first place – the crypto exchanges.

The revolution can only be permanent if it eats its own children. More precisely, when it throws its own children to the new children. It knows no respect for the traditional, that is its nature, even if the traditional is its product.

Pancakeswap attacks Uniswap

However, Uniswap is also one of the children of the crypto evolution – and as such is also under the constant threat of being eaten by another child. And directly in sight, one is already sharpening its knives: Pancakeswap.

To fully understand this, you have to reach out a little bit: The silver bullet to avoid being eaten by revolutions or their children, as we all know, is to become that revolution or its child yourself.

Attack is the best defense: Truly innovative companies try to make themselves obsolete. When inevitably what must happen happens, the only salvation lies in being the first. If you initiate the process that makes you redundant yourself, you have the best chance of directing it and profiting from it.

Coinbase and most other exchanges ignore these rules. They compete AGAINST DeFi by sticking to the central model. In doing so, they are inevitably competing with what they actually stand for and what makes their products – such as Ether – valuable in the first place: the revolution of decentralization.

What do you find appealing about DeFi?

The originally Chinese, now primarily digital altcoin exchange Binance, on the other hand, is trying to replace itself: It has created the Binance Smart Chain (BSC) – a clone of Ethereum that is faster with slightly shorter block intervals and more centralized through the Proof-of-Authority consensus algorithm. Since BSC otherwise resembles Ethereum like one snowflake to another, the switch is extremely easy.

Thanks in part to the support of Binance, an exchange with a bulging fighting chest, Pancakeswap on BSC has become Uniswap’s strongest competitor. In this context, Pancakeswap mainly benefits from a weakness of Ethereum: The blocks are full, the gas limit is exhausted, and because the developers do not want to increase it and neither Layer 2 solutions nor ETH2 help in the short term, many users are increasingly frustrated.

  • Those who handle amounts under $1,000 will have little fun with DeFi when transactions usually cost at least $10 and, in unpredictable extreme cases, $100 or more. Ethereum thus offers its children, like BSC, a perfect template to call to the table – and the market is only too happy to answer the call. The revolution is not forgiving of weaknesses.
  • Let’s look at the numbers: Over the past 30 days, UniSwap had trading volume of just over $52 billion. Pancakeswap reached just over half that, at just over $28 billion. This alone should be a warning signal.
  • However, the situation looks much more dramatic if you look at the last 24 hours: Uniswap reached 1.29 billion, Pancakeswap 1.22. That’s already a neck-and-neck race.
  • In the weekly view, Pancakeswap has already won this race: It’s $9.58 billion for Pancakeswap versus $8.98 billion for Uniswap. The flippening has already taken place; the relentless revolution is also eating its child Uniswap and Ethereum.

Venture capitalists, too, and especially venture capitalists, are looking for the projects that will drive a revolution and make everything else, including venture capitalists themselves, obsolete. So it came to pass that, led by Pantera Capital, a group of investors are now backing the developers of Injective Protocol with $10 million.

Injective has a thoroughly interesting plan: the team wants to build a “decentralized competitor to Robinhood.” Robinhood is an app through which users can invest in stocks, ETFs and cryptocurrencies with no trading fees. The fact that these assets don’t yet exist as tokens is what makes Injective so interesting.

decentrialized financeThat’s because the protocol allows users to create “synthetic tokens” that track the shares of publicly traded companies, such as Apple, or indices, such as the Dax. If the stock exchanges and public companies are reluctant to become part of the revolution and issue “security tokens” – then the revolution will just make them its children without their consent. It can be done with, but it can be done just as well without. Pretending they don’t exist has never protected anyone from falling into the revolution’s jaws.

I suspect Injective’s synthetic tokens work something like the Mirrow protocol: users who reproduce stocks and other securities on Injective must back them up with deposited tokens. Usually, these are the protocol’s tokens, giving developers and investors a bright prospect of profits right away. Dollars and shares of Amazon, Netflix, Tesla and Google have already been “synthesized” on the basis of the Mirrow protocol, allowing you to trade their tokens on both Uniswap and Pancakeswap.

But Injective isn’t just looking to eat traditional stocks. That’s because the protocol doesn’t run on Ethereum or the Binance Chain. Both are too slow for it, and in the case of BSC, too centralized. Instead, Injective forms its own blockchain based on the Tendermint consensus algorithm and runs as a sidechain in the Cosmos universe.

Like BSC before it, Injective is fully compatible with Ethereum’s EVM. So anyone using a Metamask wallet simply needs to point it at the Injective blockchain, and everything will remain as it is. Likewise, anyone who has ever used a Smart Contract for Ethereum should feel at home. Yes: you can simply copy any Smart Contract, modify it slightly, and upload it to the Injective sidechain.

It’s this essential part of the crypto revolution – the transparency of code, the permission-free nature, and the lack of blockchain ownership – that makes it so easy to eat its children in the first place.

Of course, this is not to say that Injective will succeed. For there is a strong crowd around the tablet on which the DeFi children lie. Everyone wants a piece of the meat. But if Injective is successful, only one question remains: Who will eat it in the end?

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