If you pay close attention to recent news in the United States, you will find that the U.S. has started to make some "small moves" again. Whether it's Paul Atkins, the chairman of the Commodity Futures Trading Commission (CFTC), or the lawmakers pushing for cryptocurrency legislation, there has been frequent mention of DeFi (Decentralized Finance) lately, with an emphasis on the need to "protect the innovation of DeFi," even claiming that "DeFi aligns with the American spirit." However, for those of us who are "smart," a little serious study of America's not-so-long history reveals that these slogans are merely a way to "pull the wool over our eyes." The sudden push for DeFi by the U.S. is undoubtedly because it is "very profitable." Through in-depth research, we find that the content behind DeFi is complex and far-reaching, crucial to the future of global finance. Today, we will comprehensively analyze DeFi, explore why it is so profitable, and uncover the true motives behind the U.S. push for DeFi.
What is DeFi?
DeFi, short for Decentralized Finance, is essentially a financial system built on blockchain technology. We are not unfamiliar with traditional financial systems, such as banks, stock exchanges, PayPal, and Alipay, which all belong to the financial system, with the core purpose of providing services related to money. These services can be subdivided into three main categories:
- Accounting Services: Efficiently and reliably recording who has how much money and who owes whom.
- Value Transfer Services: Simply put, this is about transferring funds from one party to another.
- Risk Pricing and Resource Allocation Services: This is a derivative of finance, addressing how to direct idle funds to where they are most needed. For example, your deposits can flow through loans to those in need, who pay interest, allowing the money to "appreciate."
All financial innovations ultimately revolve around these three issues, seeking more efficient tools to solve them. So, what kind of tools are considered advanced? The answer is: the higher the degree of automation, the more advanced it is. Just like doing laundry, from hand washing to smart washing machines, and eventually to future household robots, the higher the degree of automation in tools, the greater the efficiency. The financial system is no different; advanced financial tools allow people to do less work, naturally leading to higher efficiency.
Why is DeFi Efficient?
DeFi is more efficient than traditional finance for two main reasons:
- Automated Execution: DeFi standardizes many financial processes and executes them automatically through smart contracts, reducing human intervention.
- Unified Ledger: All records of transactions, collateral, loans, and transfers are stored on the blockchain, with data being unified, public, and transparent, greatly enhancing efficiency and credibility.
In simple terms, DeFi is like a "smart washing machine," but it is a more efficient financial tool. Its business logic is not much different from that of the commercial expansion of smart washing machines.
The Business Implementation of DeFi: A Comparison with Washing Machine Sales Systems
The commercial expansion of smart washing machines typically consists of three segments: headquarters, regional managers, and distributors. The business implementation of the financial system also has a similar structure, divided into central, local, and offshore segments. Taking the U.S. financial system as an example:
Central Segment: Equivalent to the "headquarters" of a company, including the Federal Reserve, CFTC, Senate Banking Committee, etc., responsible for formulating financial strategies, with the core product being the U.S. dollar.
Local Segment: Similar to regional managers, referring to financial institutions in various U.S. states, which are managed uniformly by the central authority.
Offshore Segment: Similar to distributors, referring to users and institutions outside the U.S., which are smaller in scale and more dispersed.
Whether users or business owners, the biggest demand is to "eliminate intermediaries," as intermediaries earn a spread and increase costs. The U.S. financial central also has a similar goal: to concentrate all user resources at the center for management, reducing reliance on local and offshore distributors. However, in the past, this was almost impossible to achieve, just like washing machine manufacturers a decade ago could not sell products directly to remote areas without distributors.
Historical Review: From Manual Finance to Internet Finance
Before the 1970s, the U.S. dollar, as a "new product," needed gold as backing (35 dollars for 1 ounce of gold). At that time, financial tools were very primitive; for example, stocks were printed on paper, and transactions were done hand-to-hand. The origin of the New York Stock Exchange (NYSE) can even be traced back to a sycamore tree at 68 Wall Street, where it was cooler and suitable for trading.
Due to outdated tools, the management capacity of the U.S. financial system was limited, and customer development relied entirely on local distributors (state banks, exchanges, insurance companies). These distributors relied on manual bookkeeping, which was inefficient and often resulted in lost money and accounting errors. In 1968, the NYSE "collapsed" due to excessive trading volume (an average of 15 million shares per day, about 150,000 transactions) because manual processing simply could not keep up.
Despite the inefficiency, distributors made a fortune, and local exchanges even made many people overnight millionaires. It wasn't until the rise of internet technology that the situation changed. In 1973, the National Securities Clearing Corporation (NSCC, later renamed DTCC) was established in the U.S., introducing a computer-based settlement system that significantly improved efficiency. The central authority required all financial institutions to adopt a unified settlement system for centralized data management, which improved efficiency and reduced errors.
The popularity of the internet further promoted the development of mobile payment and other services, benefiting both the central authority and users, but making life difficult for intermediaries. Local financial institutions were gradually consolidated, with NASDAQ being a typical example. It started as a private company providing electronic management systems for local exchanges, later expanding its business to connect exchanges across the U.S., and ultimately being "incorporated" in 2006 as a nationally certified exchange.
Why is the U.S. Pushing for DeFi?
Today, the U.S. domestic financial market has basically achieved "de-intermediation," but the offshore financial market (which holds two-thirds of global dollar assets) remains an enticing "fat piece." In the past, the U.S. could not fully control the offshore market because offshore banks were small in scale, numerous, and had non-unified ledgers, making regulation very difficult. The emergence of blockchain technology has changed this situation.
All transactions on the blockchain are public and transparent, with unified data. The CEO of Visa once stated that the market for dollar stablecoins is primarily overseas, not within the U.S. The CEO of Tether also pointed out that the financial efficiency within the U.S. has reached 90%, with limited room for improvement by introducing stablecoins (at most to 95%); however, in the offshore market, financial efficiency is only 10% - 12%, which could be improved to 50% with the introduction of stablecoins, indicating significant potential.
Therefore, DeFi, as a tool, aims to incorporate offshore financial users. The U.S. seeks to dominate the DeFi ecosystem (including regulation, infrastructure, asset types, etc.) to reclaim control over the offshore market. For example:
Regulatory Aspect: Led by U.S. institutions (such as CFTC, OCC).
Corporate Aspect: The U.S. controls the DeFi ecosystem through acquisitions (like Circle) or by supporting compliant teams.
Infrastructure: Traditional banks and exchanges act as custodians, participating in the construction of DeFi infrastructure.
Asset Types: According to upcoming legislation, on-chain assets will include stablecoins, digital commodities, digital securities, etc.
User Aspect: Traditional exchanges and brokers will also participate in on-chain business to attract more users.
A comparison reveals that the U.S.'s control over the offshore market in the past was limited to infrastructure and user access, but with DeFi, almost all levels can be directly managed by the U.S. DeFi not only "decentralizes" but also "de-intermediates," weakening the interests of intermediaries while also "de-regulating" — but the regulations being removed are those of other countries.
Risks and Opportunities
Risks
The proliferation of DeFi will have a huge impact on the offshore financial market. Offshore financial centers like Dubai, Singapore, and the Cayman Islands may gradually be eroded, much like how the U.S. incorporated various state financial systems over the past 20 years. The business volume of banks in these centers may significantly decrease, as daily transactions and investments may increasingly use stablecoins instead of dollars.
Moreover, if the U.S. introduces a crypto-friendly ICO (Initial Coin Offering) registration process, companies may no longer choose traditional listings but instead directly issue tokens for financing. Small businesses that previously opted for listings on the Hong Kong or Singapore stock markets may turn to the U.S. stock market to issue tokens for greater liquidity. This will reduce the attractiveness of offshore exchanges, and investors need to be cautious about the small stocks of these exchanges.
Opportunities
In the face of significant policy changes, companies that align with U.S. thinking will find opportunities. Here are some examples:
Stablecoins: Circle (the issuer of USDC) has closely cooperated with U.S. regulators from the start, showing excellent stock performance, even though its scale is smaller than Tether. Tether, while slower to respond, is also working hard to catch up.
Public Chains: Ethereum promotes stock on-chain through protocols, while Solana actively aligns with U.S. policies (such as holding annual meetings in New York), both vying for U.S. support.
Exchanges: Coinbase is deeply tied to the U.S. at both the infrastructure and asset levels, launching USDC and providing third-party custody services. Although its trading business is not as strong as its competitors, its non-trading business performs well, potentially making it the biggest winner in the market incorporation.
Investment Advice
The key to investing is "those who follow the trend prosper, while those who go against it perish." Choose companies that align with U.S. policies, prioritizing those that are "quick to respond," such as Circle and Coinbase. However, from a long-term competitive perspective, it is still essential to assess the company's own strength, including user scale, profit levels, and innovation capabilities.
Conclusion
DeFi, this "naive youth" born from freedom, has now been "armed" by the U.S., becoming an important tool in its financial strategy. It not only achieves decentralization and de-intermediation but also removes obstacles for the U.S. in the global financial game. On the historical stage, the story of DeFi is just beginning, and we are merely passersby; only by seeing the trends clearly can we find our place in this financial battle.
(For those who have listened this far, a thumbs up to you! Although this content may be a bit dry, you have already seen the essence of the DeFi market. How will it affect you and me in the future? Let's wait and see!)
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