Host: Alex, Research Partner at Mint Ventures

Guest: Mindao, Founder of dForce

Hello everyone, welcome to WEB3 Mint To Be initiated by Mint Ventures. Here, we continuously question and deeply think, clarifying facts, exploring realities, and seeking consensus in the WEB3 world. We aim to clarify the logic behind hot topics, provide insights that penetrate the events themselves, and introduce diverse perspectives.

This episode is the second in the "Current Status and Future of the Web3 Track" podcast series, where we will discuss the present and future of DeFi, the most mature track of the Web3 business model. In the previous episode, we talked about Crypto AI. In the upcoming series, we will invite corresponding guests to discuss topics related to Meme, public chains, Depin, gaming & social, Payfi, and web3 policies.

Alex: In this episode, we will talk about DeFi. We have invited the OG in the DeFi field, Mindao, who has previously participated in our podcast to discuss AAVE and stablecoins. First, let’s have Mindao greet our listeners.

Mindao: Hello everyone, I’m very happy to be back at Mint Ventures to talk about DeFi. It has been a while since our last discussion, and there have been significant changes in the entire DeFi track. I think this is a good opportunity to summarize and share some observations.

Understanding and Explanation of DeFi

Alex: Great, I’m looking forward to it. Many of our listeners are friends who have not yet officially entered this industry, and there are quite a few new friends who are interested in Web3. So, the first topic we want to discuss is for those friends who have not yet officially entered this industry. Mindao has actually been practicing in the DeFi field for several years. If you have friends around you who are not very familiar with crypto or Web3 and they ask you what DeFi is, how would you explain it in a way they can understand?

Mindao: Actually, I face this question every cycle, which is how to explain Bitcoin, Ethereum, and DeFi. At this point, Bitcoin has reached a new high, so many newcomers will ask me what DeFi is. I think the good thing is that many people have a concept of Bitcoin as a non-sovereign currency or electronic gold, a decentralized system. So when these friends ask me, if they understand Bitcoin itself, my simple explanation is: Bitcoin is a currency, we treat it as a decentralized currency, and DeFi is an expanded version of Bitcoin, encompassing all the financial systems we encounter in traditional finance beyond just currency, such as trading, payments, lending, and banking services, which can all be realized within the expanded DeFi field. You can think of it as an expanded version of Bitcoin, an application version of Bitcoin. This is how I explain it to friends, and many of them can get it. Of course, if they have no understanding of Bitcoin at all, then I might need to start from the perspective of decentralization and permissionlessness, but I think most people can easily grasp some essence of DeFi with this analogy.

Alex: Yes, they often follow up with a question, saying that while Bitcoin can be understood as electronic gold and a non-sovereign asset, most of our traditional financial services seem quite convenient. What additional value does DeFi provide? If they ask this, how would you summarize it?

Mindao: Since I come from traditional finance, I think people in traditional finance also know that the regulation of traditional finance is completely over-regulated, which is why it’s particularly difficult to open a bank account now. There’s a lot of debate in the U.S. about many tech companies, especially some entrepreneurs in the crypto space, being "debanked" (denied banking services) and having no banking services at all. If you really compare it to 10 or 15 years ago, traditional financial services have actually become increasingly difficult to use, with higher thresholds and greater resistance. So I think the biggest difference between what DeFi offers and traditional finance (TradeFi) is that, essentially, DeFi returns to the essence of finance, which is an information network. Traditional finance has completely fragmented this information network due to different regulations in various countries, bank regulations, and policy differences, leading to a complete fragmentation of information transmission and significant resistance. DeFi restores it; finance is information. So whether you are trading, issuing assets, or lending, it returns to the transmission of information between information, with no obstacles, hence the term permissionless. This is also the biggest enhancement that DeFi brings to traditional finance. As long as your information can be transmitted at what we might call the speed of light, with no obstacles, the capital efficiency is thousands of times higher than traditional finance. And what we see now is indeed like this: in DeFi applications, if you compare it to traditional finance, for example, lending compared to banks, trading compared to exchanges, U.S. stock exchanges have holidays and can’t operate on weekends, and opening accounts across countries requires permissions, making it impossible for an ordinary person to trade U.S. stocks and domestic stocks or Russian stocks simultaneously. But in DeFi, borders do not exist. So I think DeFi reduces finance to an information theory perspective; it is just information. Therefore, DeFi allows information to be transmitted most efficiently, at the speed of light. But in traditional finance, you find that information does not travel at the speed of light; I even think it doesn’t reach the speed of sound because there are barriers everywhere, with border barriers, regulatory barriers, and barriers between banks. So in terms of efficiency, returning to the most fundamental principle, DeFi must be many times higher than traditional finance.

Views on the Current State of the DeFi Track

Alex: Understood, let’s discuss a deeper topic. In fact, as of today, we can say that DeFi has developed through more than two cycles. The last cycle, which we refer to as the DeFi summer of 2020 and 2021, saw a flourishing of applications, but very few of those projects have survived to this day. Moreover, the number of innovative new projects in this cycle is far less than in the previous one. How would you evaluate the overall state of the DeFi track currently?

Mindao: I think the entire DeFi track is very similar to the innovation in the tech field, especially in finance. At first, there was a flourishing of various narratives. Because people did not yet have an understanding of the narrative itself, during the DeFi summer, new financial play methods emerged every day. But you find that after sufficient competition, a few tracks will settle down, which we call validated tracks. Looking at these two cycles, I think the fundamental DeFi primitives have not surpassed what we had in 2019. In 2019, we had 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, while Aave was still called Etherlend, which was doing P2P lending; that approach was wrong, and later it copied Compound’s method and succeeded. So at that time, the entire DeFi primitives were just those three: stablecoins, AMM, and lending. Looking back now, the entire foundation of DeFi remains unchanged with these three, with some variations on top, such as order books and concentrated liquidity, and some improvements to AMM. Lending, besides pool lending, also includes isolated pool lending, but essentially, I think it has not deviated from these three methods. So the current state of the track is that from the perspective of these two cycles, there are two particularly interesting changes. One change is that DeFi has been heavily commoditized; every new chain and every Layer 2 that comes out has those three major components: stablecoins, lending, and AMM swaps. Each chain has these three components heavily commoditized, and a lot of this is based on the existing projects’ code in the market because it is open source; Uniswap and Aave use this code. But at the same time, another interesting phenomenon is that while being heavily commoditized, the concentration is also increasing. For example, the market share of Uniswap in spot trading and Aave in the lending field is on the rise. So this actually reflects that in the DeFi track, I think the commoditization and the increase in concentration are happening simultaneously. In fact, over the past few years, many new DeFi applications have emerged. Of course, this is also based on the change in people’s understanding of DeFi. From the traditional so-called decentralized core DeFi to now, there are many applications that combine De-CeFi. So I’m not saying there is no innovation; in fact, the track has become highly standardized at the fundamental primitive level, just those three major components, and these three components have also been heavily commoditized, while concentration is increasing. But on the segmented level, some new DeFi applications and tracks have also emerged. I think this is a very interesting phenomenon that has appeared as the infrastructure has developed.

Alex: Right, you just mentioned the three major components: stablecoins, lending, and AMM swaps. Derivatives have also been a significant product category since the last cycle. What is your view on derivatives? Is it suitable to be done using DeFi methods? Do you see potential for its future development?

Mindao: This point may relate to another question, which is about the underlying logic of the evolution of the entire DeFi track. I have mentioned a so-called first principle of DeFi in my previous discussions. What is the first principle? First, it must be in the areas with the greatest resistance that applications will emerge first. For example, in the past, Ethereum Layer 1 had a significant medium of resistance; even if information could be transmitted to Ethereum at the speed of light, due to gas fees and its low throughput, the DeFi that could occur on the Ethereum mainnet was limited to the few types we discussed earlier. For instance, why did Aave fail to succeed with P2P lending but succeeded with the pool model? It’s because P2P lending, with its high gas fees and low throughput on the main chain, simply couldn’t operate; its efficiency was too low, and individual matching was inefficient. Similarly, why did order books not work on the Ethereum mainnet? At that time, dYdX tried to implement an order book on the mainnet but later withdrew and moved to StarkNet, and now they are developing an app chain. You find that order books also cannot run on the Ethereum mainnet, while AMM can. In fact, I believe that the establishment of all DeFi applications follows a principle: starting from low-frequency applications, such as lending and AMM, which do not have very high frequencies, and stablecoins also involve large, low-frequency transactions. As we move towards better-performing Layer 2s or new Layer 1s, you will see medium-frequency and high-frequency applications emerging immediately. Regarding perpetuals, why are they currently being developed by centralized exchanges rather than on the previous Ethereum mainnet? Because centralized exchanges are places where the highest frequency applications can emerge; perpetuals can only arise in such environments. However, what’s interesting now is that new high-performance Layer 1s, high-performance Layer 2s, and app chains are all emerging simultaneously, and we are seeing perpetual trading with significant volumes. For example, in Base, Synthetix Futures, and Arbitrum with GMX, and now the recently popular Hyperliquid, which, like dYdX, is built on Cosmos SDK. You find that so-called perpetual applications belong to high-frequency applications, and they must have high-frequency infrastructure to support them. This is why we are seeing many perpetuals emerging in this cycle. I think the perpetuals in this cycle may not necessarily be able to compete with centralized exchanges like Binance or OKX because there are still many performance issues. However, I believe that with Layer 1s, including app chains like Hyperliquid, which can be considered very close to the experience of centralized exchanges, the emergence of such application chains could potentially allow perpetuals to compete with centralized exchanges in the future. Of course, you cannot make a one-to-one comparison, nor is it necessary. After all, one exists in a DeFi or permissionless model, while the other has KYC and other elements, resembling a centralized exchange model more. But in terms of performance comparison, I think it may come very close to the experience of centralized exchanges.

Potential Space and Evolution of DeFi

Alex: You just mentioned that from 2019 to now, the three major components of DeFi, or the most validated application types in the market, have not changed much. Therefore, many people say that the foundational innovation of DeFi has actually been completed and believe that there may not be many surprises in the future. In this cycle, we also haven’t seen products that are as eye-catching as those in the previous cycle. However, some still believe that the potential of DeFi is far from being fully realized. What is your view on this perspective? If DeFi still has significant growth potential in the future, what do you think the driving factors are? How might it evolve?

Mindao: At the foundational level, because the entire DeFi is based on blockchain architecture, it is built block by block. This is why we see not much innovation at the foundational paradigm level; essentially, whether it’s the Ethereum mainnet, Layer 2, or Solana, they are all constructed based on a block-by-block model for the underlying infrastructure. However, the changes in this cycle of DeFi compared to the previous two cycles lie in the significant shifts in people’s understanding of DeFi. Previously, DeFi was called decentralized finance, but I believe that now people no longer consider decentralization as a core component. More importantly, it is about permissionlessness. In this cycle, I have seen some innovative projects, such as Pendle and Ethena. Pendle is a protocol for swapping fixed and floating interest rates, similar to a fixed income protocol. Ethena is a typical stablecoin project focused on USDE. Its strategy for stablecoins is something I have been involved in since I entered the crypto space in 2014, which is to engage in what we call basis point arbitrage. In the entire trading strategy, since Bitcoin began, the market has been doing this, which is essentially how to conduct basis point arbitrage between spot and futures. Ethena turns this into a token, democratizing what was previously an in-house strategy used by some traders, allowing the market to capture the basic returns from the fluctuations of Bitcoin or other currencies. If you ask people from previous cycles, no one would consider Ethena a DeFi project because its entire infrastructure is built on centralized exchanges for arbitrage, and although the assets are custodial, this custody is not on-chain but through custodial institutions. So from an architectural perspective, it doesn’t appear to be DeFi. However, from the perspective of tokenization, where everyone can use its token to mint it and swap it for existing tokens, it is indeed DeFi. Therefore, I think we can refer to such applications as De-CeFi or Ce-DeFi. There are many such applications in this cycle, such as some projects in the Bitcoin ecosystem and some liquid-staking projects, many of which follow a similar path. So I think we are currently expanding the entire definition of DeFi significantly, and you will find that the contribution to the total value locked (TVL) in DeFi that has emerged in this cycle includes a large number of projects like liquid staking, like the Ethena project I just mentioned, as well as projects related to real-world assets (RWA) being tokenized, which actually contribute significantly to the revival of DeFi. Therefore, I believe the evolution of DeFi is an evolution of the entire concept, from what we previously considered pure decentralized finance to open finance, and now it is actually a hybrid, a mix of centralized and decentralized elements. So from this perspective, I think there will be many interesting combinations of opportunities in the future. Of course, if you purely look at it from the most original, fundamentalist DeFi perspective, there are indeed not many options. Because in the past, for example, the decentralized stablecoin track has basically no one working on it, or the previously very degen Ponzi stablecoin track has no projects working on it anymore. Unlike during the DeFi Summer when a bunch of projects emerged with on-chain governance decentralized stablecoins. So I think after the change in definition, you will find that the DeFi track is still producing many new applications, and the growth of TVL is very rapid.

Limiting Factors for DeFi Development on Solana

Alex: Just now, Mindao mentioned that the first change is in the definition of DeFi, and the second is that the real value provided by DeFi has shifted from decentralization to permissionlessness, with convenience and accessibility for everyone. I have always had a question: Solana, as a chain, is quite different from Ethereum in that Solana’s nodes may be fewer and more centralized, while Vitalik has always emphasized that Ethereum’s nodes are decentralized and have stronger censorship resistance. However, when we look at user experience, decentralization doesn’t seem to be that important; in fact, in terms of accessibility and technical usability, Solana performs very well. Yet even in this cycle, we find that Solana’s DeFi evolution has not resonated significantly with its overall ecosystem’s business data. Whether we look at its DeFi TVL, on-chain stablecoins, or the TVL of DeFi projects, it seems that they have not evolved very quickly compared to Ethereum’s business data. For chains like Solana, which have relatively slow DeFi evolution, what do you think are the possible reasons or limiting factors?

Mindao: I think this point is due to a significant misunderstanding of DeFi; people believe that as long as a chain is fast enough, funds can be quickly migrated over. Since we have been involved in DeFi from 2019 until now, I believe that DeFi is similar to all financial enterprises: the longer it runs, the greater its stickiness. The so-called stickiness of financial enterprises is actually a continuously increasing security threshold. For example, how do you verify whether a DeFi system is robust enough? Ethereum's entire DeFi system is now approaching a TVL of nearly $200 billion. This means there is a $200 billion bounty within the ecosystem, which is the amount of funds available for various hackers to attack. This TVL did not come from nowhere; it has emerged after Ethereum has incurred losses of possibly hundreds of billions of dollars in the past, creating such a high moat. So why can't Solana migrate this over? The entire trust cost and security cost are very high in this regard. This is also why Ethereum's value lies in the fact that as long as it has enough time to operate, this TVL is very difficult to migrate away. Moreover, I think there is another critical issue: I have used new applications in these ecosystems, and from an interactive experience perspective, I don't think chains like Base or Arbitrum would lag behind Solana by much. In fact, gas fees on Base are even lower than those on Solana. Where is the downside? I think it lies in user perception; Solana as a chain does not have layers 1 and 2, so there is no confusion. However, Ethereum has too many layers: Arbitrum, Optimism, Base, Superchain, and a bunch of others. Conceptually, I think this may create confusion for retail investors in terms of go-to-market strategies. Returning to your earlier question about why its TVL and DeFi cannot migrate there quickly, I believe this network effect, along with Solidity as a development language, has the most comprehensive tools, the most audit cases, and the most components. From this perspective, I think for chains like Solana, completely replicating this is very difficult. Moreover, the fundamental question is why Ethereum is moving towards Layer 2 and what advantages Layer 2 will have in competing with single chains like Solana in the future. I believe that if more enterprises want to launch chains in the future, you cannot expect large banks like Bank of America or JP Morgan to build all their financial infrastructure on Solana; they will definitely launch their own chain. In this case, they will choose a large public chain to support them, possibly by building a Layer 2 on Ethereum. Under this premise, if you can find more TVL and combinatorial applications, then from this perspective, it will be even more challenging for Solana to leverage Ethereum's TVL. Therefore, you find that the network effects between TVLs constrain each other; it is not simply a matter of saying that if my chain's token rises, all my TVL applications will migrate over. Recently, I noticed an interesting phenomenon regarding USDT. USDT is currently consolidating all its chain tokens, migrating a large number of USDT issuance rights from other Layer 1s to the Ethereum mainnet. This is also based on security considerations. Therefore, I believe that the so-called stickiness and security of DeFi make it very difficult for other new Layer 2s to pry this away in a short time, even if their experience is better. Not to mention that, as I just said, there are many Layer 2s on Ethereum that are not inferior in performance to these new Layer 1s.

Advantages of the MOVE Language

Alex: Understood. Assuming that many public chains using the MOVE language have emerged, including some EVM-compatible Move Layer 2s, and recently Movement was just listed on Binance. The value proposition they have been promoting is that using the MOVE language to build DeFi and various financial services is safer than using Solidity. As a developer and entrepreneur, do you think the advantages of the MOVE language are attractive enough for developers?

Mindao: We have looked at these ecosystems, including our early acquaintance with the Solana team, who use Rust. In terms of expressiveness, many people say that Rust is much better than Solidity and can do many things. Not only MOVE, but many new public chains like Tezos have also created their own new languages, focusing on various forms of formal verification. However, you will find that these new languages quickly disappear. I think the core issue is that it is difficult to strictly say which language has a significant inherent advantage from an architectural perspective. For a developer, the most critical factor is timing. The earlier you use it, the more issues Solidity has encountered, and developers have filled those pitfalls with real money. In this case, can you say it is less secure? At least from our development perspective, I do not see it that way. Because it has enough cases, enough tools to support it, enough automated auditing resources, enough auditing firms covering it, and enough hackers. For example, if I issue a bounty, there may be tens of thousands of white hat hackers capable of working within the Solidity scope, while the MOVE and Solana ecosystem may only have a few hundred or a few thousand. Therefore, I think security itself is a variable; there is no such thing as an absolutely secure language. The biggest problem for new languages is how they will build their own moat in the future. If there is not enough initial momentum, it may end up in a state similar to burning wet firewood, which will never reach the ignition point. In this case, its security may not be a certainty, unlike Solidity, which has enough cases to validate it. Therefore, I believe that no language is absolutely superior or inferior; rather, if a language reaches a network effect, it is very difficult to replace it. This is also why we see projects like Monad trying to use EVM compatibility for Solana's high-performance underlying architecture. You see that there are many new Layer 1 infrastructures coming from that route, focusing on how to create new, higher-performance public chain infrastructures, such as EVM-compatible execution environments or new public chains. There are indeed many projects along this route now.

Impact of Changes in the U.S. Political Landscape on the Crypto Space

Alex: I understand, as you just mentioned, Monad and Movement seem to be heading in this direction. This year, there has been a significant policy change, starting in November, with Trump taking the presidency and the Republican Party gaining a majority in both the House and Senate. It seems that the outlook for the development of the crypto industry in the U.S. has greatly changed, especially with the recent ruling by the Fifth Circuit Court that the previous OFAC sanctions against Tornado Cash were illegal. How do you view the impact of the current changes in the U.S. political landscape on DeFi and the entire crypto space? What are the optimistic aspects, and what are the potential risks?

Mindao: From an optimistic perspective, it has exceeded my most optimistic expectations; I did not expect it to be so intense, with Trump’s bull market and his children directly entering the DeFi project space. I think the infiltration of crypto into the Trump administration is significant, especially with family members like Donald Trump Jr. involved in DeFi projects, and Baron, another child, who is still in school, is also engaged in the DeFi NFT space. This could have a substantial impact on Trump’s core circle. Additionally, figures like Vance and David Sacks, all part of the PayPal mafia, are also involved. So you can see that within the roles Trump can influence, they are all pro-crypto individuals. Therefore, I believe that politically, it is undoubtedly more optimistic than I expected, and I might even be overly optimistic. This is something I am concerned about, including whether Bitcoin will be included in the U.S. reserves. From an optimistic standpoint, I believe that this cycle has no ceiling; rather, this optimism itself may break the previous four-year cycle in the crypto space. I think there is a high probability that a completely independent regulatory framework specifically for crypto will emerge, rather than the current SEC framework that forcibly categorizes crypto under the securities law system. It is possible that a completely independent regulatory system will appear. If this happens, I believe it could be very optimistic not only for DeFi but for the entire development of Web3. On the pessimistic side, it is now very clear that cryptocurrency is no longer a non-partisan political issue; it has become a partisan issue. This is something I am quite concerned about; after the election, a line has formed between the Republican and Democratic parties regarding crypto and anti-crypto. I think cryptocurrency is now treated as a divisive issue in bipartisan politics. What if Trump does not win the Republican nomination in four years? Will these policies be changed again? It is now very difficult to return to a neutral topic; it has become a core issue of alignment between the Republican and Democratic parties.

Alex: Yes, Trump may not necessarily last four years; it could be until the midterm elections in 2026, and whether the Republicans can secure enough seats in Congress will also be a challenge.

Mindao: Yes, but I think the positive aspect is that this operation is not just about Trump taking office; it also includes the lobbying efforts in both the House and Senate. The U.S. political scene has developed a certain respect for the entire crypto lobby. This respect, which I do not necessarily mean in a positive sense, could be seen as a negative one, as it indicates that the influence is too significant. Especially with the support of Ripple's organization for several lobbying teams, the win rate in this Senate election was 85% for the senators they backed. These crypto senators had an 85% win rate, which is very high. So this is quite alarming, as it means that in the future, all those against crypto may not have a chance to enter U.S. legislative agreements. From this perspective, it may also provoke some backlash from the Democratic Party or anti-crypto individuals.

Alex: Yes, I see Fair Shake is already preparing for the 2026 midterm elections, raising tens of millions in advance.

Mindao: Yes, of course, this is a good thing; not only from an administrative level but also from a legislative level, the penetration is very deep.

Speculations on Bitcoin's Entry into National Finance

Alex: From your current observations, one of the most discussed narratives in this cycle is Bitcoin's entry into national finance. Not only at the national level, but states are also preparing Bitcoin legislation; I see that states like Pennsylvania and California have already submitted legislative proposals 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 legislating at the national level in the U.S. may not be that easy. At the state level, it might be more manageable because the financial scope that can be controlled at the state level is relatively small. However, at the national level, I think there may be some difficulties. One issue is that there is still a strong faction in the U.S. that generally views Bitcoin, although often referred to as digital gold, as a non-sovereign currency. This positioning itself fundamentally opposes the so-called debasement of fiat currency. Therefore, from the fundamental purpose, it conflicts with the desire of most Americans to see the U.S. as the sole international reserve. Many people in U.S. politics hold this view. They believe that Bitcoin, although called digital gold, is ultimately competing with the U.S. dollar. And indeed, it competes with all fiat currencies because Bitcoin's growth space is a result of the debasement of fiat currencies. So, in this regard, I think the resistance is quite significant. Of course, this depends on how strong Trump's political conviction is to push this forward; it's hard to say. According to his style, he might really push hard for it. But this is not just about the U.S. president pushing it; it also requires legislative approval.

Alex: Right, I agree with your point. I see that many countries under U.S. sanctions, including Russia and Iran, are now considering Bitcoin as a potential option for national reserves, and their imagined adversary is the U.S. dollar. They believe that using Bitcoin as a reserve is better, which indeed challenges the dollar's status as a fundamental reserve asset.

Mindao: Yes, so now everyone defines Bitcoin as digital gold, which is quite a clever strategy. They say they are competing with gold, aiming to reach a ratio of $13 trillion or $15 trillion, and then they will deal with gold. No one is currently mentioning competition with the dollar, but I think at the core, it remains the same. If you say gold, but you are also digital gold that can be infinitely divisible, what is the difference from currency? There is no difference. However, the crypto community is also reluctant to place too much importance on this topic. But I believe the U.S. Treasury or the financial sector understands this quite well.

The Possibility of Large Companies Purchasing DeFi Projects

Alex: Let's discuss a more focused topic on DeFi. Now that we have Bitcoin ETFs and Ethereum ETFs, it is no longer big news for publicly listed companies or government finances to hold BTC; it is quite normal for most companies to buy Bitcoin. In your view, as the crypto industry becomes more compliant in the U.S., will they consider acquiring some blue-chip DeFi projects, such as Aave or Uniswap, as potential targets for mergers or at least equity stakes? Do you think this could happen in the next one to two years?

Mindao: This is also a very interesting topic. What we see now is that Bitcoin ETFs and their relationship with Wall Street or traditional finance treat Bitcoin merely as another trading asset, like digital gold. In fact, there is still a disconnect between it and traditional finance; it is just part of AUM, part of asset management, and users want it, so they provide it. However, I think there have been some interesting changes in this cycle. One is that, aside from the complete independence of these two entities, Bitcoin and gold are actually not much different; my company, Blackrock, also provides different products for my users, which are not fundamentally related to Blackrock itself. But the relationship between Bitcoin and MicroStrategy is quite interesting. MicroStrategy is a traditional company; it is a software company, but now it can be considered a financial company, right? However, its relationship with Bitcoin is actually similar to the relationship between ETFs and Blackrock, as completely independent entities. Now Bitcoin and MicroStrategy have a twin relationship. Why is it a twin relationship? The key point connecting these two twin brothers is volatility. The volatility of Bitcoin and the volatility of MicroStrategy's stock are linked. Bitcoin's volatility affects its stock volatility, and vice versa. So I think this is a particularly interesting phenomenon, as it establishes a dual-token mechanism between Bitcoin and U.S. publicly listed companies, where one is Bitcoin and the other is the stock of the listed company, similar to how we play with dual tokens in DeFi, where the child token and parent token are linked in their economic models. Particularly interesting is that Bitcoin and MicroStrategy, to some extent, form a dual-token mechanism, establishing a connection between the volatility of traditional stock prices and Bitcoin. Now, returning to the DeFi level, if Blackrock were to buy Aave or Uniswap tokens, I think that would not be very sexy. I predict that in the next three to five years, we will see a twin relationship similar to that of Bitcoin and MicroStrategy between DeFi and publicly listed companies. What does this mean? It means that a DeFi protocol controls a publicly listed company, which could be a bank or a lending company, and it can connect fiat channels to Aave, or a listed exchange can directly call its fiat into a DeFi on a chain. This is what I truly believe could happen, forming a twin relationship between DeFi and Wall Street companies. I think this is what is likely to happen in the next cycle. Because now we see that, aside from MicroStrategy, companies like Marathon and many mining companies have started buying Bitcoin. Using MicroStrategy's strategy means that its stock is not only related to the difficulty of Bitcoin's hash rate but also has a correlation with Bitcoin's price. Therefore, I think the greater potential and more interesting point for DeFi in the future lies in what we call "pre-listed companies, post-DeFi." Your publicly listed company serves as another channel for my DeFi to issue bonds, conduct equity financing, and obtain banking licenses, thereby connecting these two worlds. I think according to Trump's approach, for example, with his current World Liberty DeFi, the next step might be to issue stablecoins, and the step after that could be to obtain a banking license, possibly integrating it into his own publicly listed company. This is entirely possible. I genuinely believe this could happen in the next three to five years, during his term. Of course, aside from him, traditional DeFi projects could also attempt to move in that direction. I think this is more interesting: how to truly establish a relationship between "tokens" and "stocks" in their economic models. Your DeFi makes money, and my stockholders benefit, and the expansion of my stock's balance sheet will also help my DeFi attract more traditional funds. I think this is a more interesting combination.

Alex: This perspective is indeed something I have never heard before; it feels very novel and imaginative. Previously, we had stock versions of BTC and MicroStrategy, and now we have DeFi versions of publicly listed companies. I find this quite interesting. Returning to the views of large financial institutions on DeFi, they may currently be more like you said, configuring a Bitcoin channel for their clients to buy; they are more focused on asset management. Do you think it is likely that they will engage in DeFi-related financial applications themselves, such as creating a potentially better version of Aave? What is the likelihood of such businesses being pursued by institutions like BlackRock or others?

Mindao: In fact, we see that traditional companies like JPMorgan have their own internal blockchain systems. Of course, these are not connected to public chains. The most common use is for foreign exchange settlements. You can think of their entire model as not much different from Curve's model, or not much different from the pools in Uniswap. But these applications are more about interbank clearing, which I think is the first step they might take. The next step would be how to push towards public chains, using public chain infrastructure. This also goes back to what we discussed earlier; I believe the entire competition among public chains, such as the single-chain model of Solana versus the multi-layer model of Ethereum, hinges on how these financial enterprises will connect to public chains in the future. If they want to do it in a controllable manner, they must launch a Layer 2 or Layer 3 and then connect to the public network. Therefore, I think if they want to enter DeFi in the future, it will definitely be in a controllable manner, within a permissioned chain. I think it will be very similar to the current models of Coinbase and Kraken, but even more conservative. This is the core of how I see their approach; they will be more conservative than those companies. Because Coinbase is still a crypto company. However, you find that Coinbase is actually more conservative than Binance. When Binance was doing BSC, many of its strategies were even more aggressive than Coinbase's. Why is that? Because Binance may have its own DeFi projects, which it may have incubated or developed itself, while Coinbase has not really incubated such projects. Therefore, I think that when traditional financial institutions enter the market, it is likely to be similar to Coinbase and Kraken. They will set up a Layer 2 and then build some components of DeFi on top of it. They will likely also use open-source codes like Uniswap. However, they may add their permissions, access, and whitelisting into their entire logic. I think it is likely to unfold in this way.

Alex: Understood. In fact, both Coinbase and Kraken have chosen the OP stack without exception, and they have basically entered the larger ecosystem of Superchain. From what you said earlier, it seems that you also believe that if these large financial institutions were to create their own chains, the likelihood of them choosing to operate within the Ethereum ecosystem is greater, right?

Mindao: Yes, I believe that regarding the so-called chain performance, Ethereum's current Layer 2 performance, including future improvements, can fully meet the needs of these financial institutions. The key point is that I think the strategies between Ethereum Layer 2, including the current OP and Arbitrum, are quite different. For example, OP has built a lot of the Superchain ecosystem for Layer 2, and ultimately, it may need to solve how to unify liquidity between Layer 2s, which involves inter-chain communication, allowing transactions to be completed across different Superchain Layer 2s, thus addressing the current liquidity fragmentation issue in Layer 2. I believe that once this problem is solved, it will bring another network effect, attracting more people to join, and the network effect of liquidity will be particularly strong. Additionally, it may become difficult for others to detach from this network. This is also why I am not worried about whether Coinbase will independently develop Layer 1. As long as there are enough chains and inter-chain liquidity and network effects are established, it won't be easy to detach. If you detach and create a Layer 1, it may become an island, which might not provide better value than being within the modern Layer 2 architecture.

Impressive Projects and Evaluation Dimensions

Alex: I feel this is one of the more in-depth insights I've heard recently regarding the moat of the Ethereum ecosystem compared to SOL. You also mentioned that you've seen some new products in this cycle. Over the past year, which products have left a deep impression on you, whether they are new developments of old projects or emerging new projects?

Mindao: I mentioned two emerging projects earlier, Pendle and Ethena. I think Pendle's model has been quite tumultuous because initially, they came out claiming to create fixed and floating rate products, which I looked into. Coming from traditional finance, I found their design particularly flawed due to the existence of an expiration date. I have a significant bias against products with expiration dates in DeFi; I believe they are essentially a dead end and won't succeed. Many previous attempts at expiration date options trading or futures trading have not taken off. So when they launched their so-called fixed income products with expiration dates, I didn't pay much attention, thinking it wouldn't hold up in crypto. However, with the emergence of the LSD and Restaking protocols, I believe they have indeed found a niche market. At least at this stage, with a large number of staking and restaking protocols, they have successfully attracted two groups of participants: one is large holders interested in fixed income who do not want to gamble on Utoken's price fluctuations or points, and the other satisfies a portion of retail investors or yield farmers who have speculative demands for U tokens. I think they have effectively combined these two groups, and at least at this stage, they have indeed identified a market demand. Many DeFi narratives can easily be dismissed at first glance. Of course, I don't think Pendle's model is the ultimate solution; whether it's interest rate swaps or fixed income products, there may ultimately be a perpetual model, such as perpetual fixed income and variable yield splits. It's somewhat like perpetual contracts, where people can trade continuously rather than having to roll their positions after expiration. I think Pendle might also be working on new things. This sector indeed seems to have found a significant application of what we call product-market fit in this cycle. As for Ethena, I believe it has transformed a trading strategy we take for granted into something accessible to the general public, and it has now grown to a $5 billion position. They are indeed leading the tokenization of the entire yield market, both from the token perspective and in terms of accessibility for retail investors. Moreover, we see that after their product launch, exchanges are all following suit, including Binance, which has launched FDUSD, and I also noticed that OKX and Binance have their lending market rates essentially anchored to the basis of this rate arbitrage. So exchanges are also learning this strategy. Therefore, I think these two products represent a solid foothold in terms of innovation in this cycle. Additionally, the on-chain representation of government bonds is quite different in this cycle compared to the DeFi summer. During the DeFi summer, projects relied heavily on subsidies, with no real yield. However, we see that in this cycle, MakerDAO's substantial yield is now derived from the underlying government bond returns. This brings us back to our earlier discussion: can we still call this DeFi? By traditional definitions, it wouldn't be considered DeFi. However, this cycle has seen what we call a combination of De-CeFi. For example, as we just mentioned, Ethena's positions are all in centralized exchanges, and MakerDAO's government bonds are all managed in offline trusts, which are theoretically quite centralized. However, this so-called combination of centralization and semi-centralization has actually resolved many real yield issues because these are real yields—one comes from the leveraged market, and the other comes from U.S. government bond returns, which are distributed through DeFi to allow users to benefit. Therefore, I think the evolution of DeFi, from a purely fundamentalist definition to a more pragmatic hybrid, is a very interesting point in this cycle. Another phenomenon we've seen in the past year is that previously, DeFi projects always had to issue tokens. Now we see that Polymarket and Pump.fun have very strong revenue demands even without issuing tokens. What trend does this indicate? It shows that applications like Polymarket and Pump.fun would not have emerged without good infrastructure. Both of these applications rely on solid infrastructure: Polymarket is based on Polygon, and Pump.fun is based on Solana. Thus, we can see that as the performance of our so-called Layer 2 and new strategies improves, a plethora of DeFi applications may emerge that do not require tokens but still provide substantial utility. This is particularly evident now. Returning to what I said earlier, the first principle of DeFi is that as performance improves, applications that rely on high-performance chains will emerge, such as Polymarket and Pump.fun, which are typical examples of this type of application. I believe we may see a large number of such applications in the future. We also see many trading bots that do not have tokens but are highly profitable. They can earn $1 million or $2 million a week, just like Pump.fun. I think this aspect is quite different from the previous two cycles. In the earlier cycles, it was very difficult to launch a project without a token. However, we now see a large number of applications of this type that do not require tokens and have found their market demand.

Alex: As an investor, what dimensions do you focus on when investing in a DeFi project, or what do you think are the typical moats of DeFi projects?

Mindao: I think it depends on the investment cycle's length. If we are only looking at a one- or two-year cycle, it may lean more towards narrative-driven projects, such as investing in some popular DeFi projects with trendy mechanisms. However, from my perspective, I look more at longer cycles, across cycles. If we view it from a long-cycle perspective, we need to identify projects that can truly survive several cycles. In the past, I thought community was very important; it seemed that a strong community drive was essential. However, I now find that community may not be the most critical factor for DeFi projects. Because we see that the highest-valued and most defensible DeFi projects are actually not closely related to their communities. For example, Uniswap now has a market cap of $10 billion, and while it has a large user base, it is hard to say it has a community. AAVE is different; AAVE has a certain community, and you can see discussions in forums. However, I believe that the major moats for projects like Uniswap, AAVE, and Maker come from two aspects: one is continuous innovation, always pushing the boundaries of each cycle with further innovations. Another key point is their strong brand. Anyone can fork Uniswap, whether it's V1, V2, or V3. I believe that about 60% to 70% of Uniswap's current market cap comes from its brand. This is something that cannot be easily forked by others, and I think these projects have achieved this. Of course, in DeFi, having a brand also depends on two factors: one is the continuous innovation I just mentioned. But you don't necessarily have to be the first to innovate; for example, AAVE was not the first innovator, but it has continuously innovated from 2019 to now, while Compound has not. The founder of Compound has moved on to other projects. After becoming a true DAO, Compound has seen little innovation, while AAVE continues to innovate with each cycle. The other core aspect of DeFi, I believe, is security. Uniswap has never experienced a security incident, while Compound, Maker, and AAVE have had incidents, but at least these security events have not prevented them from thriving. Therefore, when these two points are achieved, their brand value strengthens with each cycle. I think this is their biggest moat. It is hard to see other projects below them, and the projects that are becoming increasingly concentrated are those with very high brand recognition.

Principles for Allocating DeFi Projects

Alex: In your specific secondary asset allocation, aside from BTC and Ethereum, which we refer to as blue-chip choices, will DeFi projects, especially leading projects, be included in your investment allocation list? Let's still talk about the long cycle.

Mindao: I generally do not allocate to them. The fundamental reason for this is that we are already involved in DeFi; we have already invested time and effort into this setup. So this is a significant difference between me and other investors: we don't need to double down on this; we focus more on allocations in public chains.

Alex: Understood. If an ordinary Web3 investor has a portfolio that includes BTC, Ethereum, and some public chain tokens, do you think projects like DeFi should be a part of the majority of ordinary investors' investments?

Mindao: I have shared before that I believe a crucial aspect of investing is the investment portfolio. For example, when I entered the crypto space in 2013, I said that my investment portfolio, aside from Bitcoin, included 30% allocated to various other projects, definitely non-Bitcoin projects. At that time, I invested a lot, including in Ethereum's ICO in 2014, betting on Ethereum. Besides Ethereum's ICO, there were many others; at that time, there were only about three or four. ICOs were very rare back then, especially in 2013 and 2014, with only a few each year, and I invested in almost all of them, of course with different allocation ratios. I believe that for retail investors, constructing a portfolio is key; you cannot go all in on Bitcoin and Ethereum. Of course, what I mean is that you really need to rely on these coins to turn things around, not just to double your investment. To turn things around, I think the first thing is not to go all in on mainstream coins. For example, some aggressive investors put 100% into altcoins. I know people around me who have lost everything. If their ability to make money is strong enough, and they can allocate funds without concern for losses, then I think that strategy is not wrong. Going 100% all in, even into meme coins or degenerate coins, I think that’s fine. When constructing an investment, I believe at least 30% should be allocated to so-called alternative investments, which are outside of mainstream coins. DeFi is definitely a track worth allocating to. Besides DeFi, I don't know what other types of applications in crypto truly have value capture. Currently, all the so-called applications with real yield and real income are DeFi applications. So, I think if you really don't consider mainstream coins and only look at altcoins, DeFi should definitely account for a significant proportion, at least over 50%. The remaining 50% could then be allocated to some degenerate coins, meme coins, or other types of tracks.

Alex: Alright, thank you very much, Teacher Mindao, for your in-depth and wide-ranging insights today. We look forward to having you share more of your knowledge and views on DeFi and crypto next time. Thank you for your time.

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