Looking at the current situation, the performance of the DEFI section has exceeded expectations, and there is no excessive risk.

How DEFI works

The starting point of DEFI from the beginning is to use the current traditional financial model as a reference, and combine the liquidity mining incentive model to create a new model independent of traditional finance, and this model is mainly based on the code on the blockchain.

At present, the DEFI we see is mainly based on economic activities such as pledge lending, money deposit management, DEX trading, derivatives, insurance, etc., and this activity is embedded with the incentive model of liquidity mining, and the market is improving. At the time, liquidity mining will cause the token incentive model to continue to appear in a positive cycle, so that DEFI can attract a large amount of funds to participate, thereby creating a thriving scene.

In the initial stage of liquid mining, the general mining and selling phenomenon is more obvious. The main reason for this phenomenon is that users have a low sense of trust in the DEFI project, which is also prone to a certain degree of selling pressure. If the project persists in this way , then naturally will form a positive cycle, that is, the currency price continues to rise and the pledge amount continues to increase. If you cannot withstand such short-term selling pressure, you may face the risk of project death.

Because of this, projects such as compound, sushiswap, etc. all experienced some selling pressure after the beginning, and the currency price dropped briefly, and after the selling pressure, the currency price rose sharply. The TVL on the chain has also increased, which makes the project rank among the best, attracting the attention of capital and the interest of users.

However, once the market conditions turn cold, it may cause an increase in currency price selling pressure, which activates the "death selling pressure" such selling pressure will be difficult to reverse in the short term due to the general trend of the market. , And because most of the DEFI projects are multiple pledges and complex nesting models, it is easy to cause a chain reaction caused by problems on one side, thereby exacerbating the collapse of the market.

The current application of the complex nesting model in DEFI is also beginning to flourish. Generally speaking, the current form of DEFI is a bit like building blocks on the basic protocol, so that there will be a state of blooming flowers. Among them, the "building blocks" are the most current ones. The popular projects with the most TVL, such as Pancakeswap, AAVE, Raydium, uniswap, etc., once a major volatility of a mainstream token appears in these heavyweight projects, it may also trigger a series of reactions in the market.

DFEI crash

If the market conditions of DEFI deteriorate, then there may be a death spiral. The main reason is that the market conditions change, the short-term big callback or the arrival of the bear market, and the existence of DEFI agreements Because of the nesting relationship, if there is a problem with a large DEFI project, it is likely to cause a chain reaction of multiple projects. In addition, the overall market changes will make many investors become more conservative, so it is very likely that DEFI will collapse in an instant or short-term.

Excess pledge allows DEFI to survive the "death spiral" that may occur under the market crash. It has to be said that this is also a very important reason for DEFI to persevere and continue to attract investors' attention. On the one hand, for DEFI, if it can persist from the "death spiral", then it can prove that the existing development direction of DEFI is generally not too problematic. On the other hand, it can also show that DEFI has the possibility of developing and even supporting the economic model of the encrypted world in the future. Since its birth, the economic model of the virtual world has become the focus of people's attention, and because DEFI has been tested by the market, it will naturally be more convincing in the dominance of the rules.