Q1: Regarding the bear market and after, what will happen in the Defi field in the next few years?
Mike: In the past, we can see a lot of bad incentives emerging in the Defi space, resulting in huge financial rewards for a lot of people. People’s motives for participating in Defi are distorted and speculative motives dominate. In the past, Defi users’ earnings came from spam, compound governance tokens, and leverage, which were not sustainable. In a bear market, the demand for user Defi will inevitably drop sharply. In the future, the Defi project party will focus on a more sustainable product model. Healthier and more native revenue models and the introduction of real-world assets can guarantee real growth in the Defi space. Given that speculators in the crypto space are still a small group, the introduction of derivatives on real-world assets could expand the audience.
Nikita: I don’t think governance tokens in Defi have the same strong stakes as traditional stocks. The governance token does not have the function of dividends, that is, it cannot capture the value of the protocol income and reflect it in the token. Going back to the 2020 Defi Summer period, we can see that hundreds of tokens are listed on Uniswap and Sushiswap, and countless Defi mining starts every day. I think the need for a redesign in the Defi space should change the way governance tokens capture value and reduce pointless Defi mining. Second, the entire Defi niche has somewhat slowed down technological innovation. For example, we cannot effectively build something on the Ethereum blockchain, like an order book DEX. At best, I’d like to see real-world assets and derivatives start entering the Defi space.
Q2: For Defi protocols, what challenges are they currently facing in the bear market?
Mike: For Balancer, we are lucky that people always need a platform to provide liquidity and exchange tokens. The worse thing right now is that some Defi protocols have to rely on token incentives to attract users to their products. In the bull market, the competition between Defi protocols is still fierce, and it is necessary to strive hard for users in the almost stock market. In the bear market, when the project party has an empty treasury, they need to throw money to start their own projects. This is undoubtedly worse. Project parties need to look at the development of the protocol over time and figure out what needs to be done to make it sustainable. After all, no one knows how long the bear market will last.
Nikita: Stepping into a bear market, as an aggregator, we can first clearly find that market transactions and exchange demand are inelastic. 1inch provides the optimal exchange rate, and the liquidity of the market will be here, so the depression of the market can be more felt. Secondly, traditional institutions have been very interested in the crypto market in the past, and mainstream Defi protocols such as (Compound, AAVE, Uniswap, and 1inch) have also been trying to introduce these institutions. A series of Defi crashes have hampered this process. Finally, Defi is not friendly enough for ordinary users, and it is difficult to expand this part of the user group. From my personal experience, most of the new Defi users entered the circle because of NFTs. Finally, the Defi field also faces regulatory uncertainty. Because Defi operates in a permissionless environment, and with the regulation that trading platforms may face, some Defi protocols are looking for certain special countries as the front line of operation and development. In the future, KYC may become a routine operation.
Q3: What is the focus of the project party in the development of the bear market?
Nikita: We will focus on ecological sustainability, continuous product iteration and support for different Defi combinations. 1inch also has a subsidy program to reward builders in the defi field. Grant objects include developers who integrate defi products into the 1inch network, community members who organize community events and product education, and researchers in the defi field.
Second, mergers and acquisitions are the easiest and most effective tools for projects and companies looking to expand and grow. In a bear market, such mergers and acquisitions become more frequent. Mergers, acquisitions, and splits are also common in Web2. Between 2001 and 2017, Google acquired more than 200 companies. But when the company grew into a behemoth, it was difficult to innovate internally, so Google formed its parent company, Alphabet, to separate its core search business from other emerging businesses. Each business line has wholly-owned subsidiaries, such as Google, Verily, Deepmind, etc. I am looking forward to the deep integration of the Defi industry, which is already being done by many large companies. Binance, FTX, and Coinbase have acquired a number of wallets and analytics platforms. However, the Defi field has not yet started mergers and acquisitions, and it may be good to do it with DAO leadership.
Q4: What is the difference between this bear market and the bear market in 2018?
Mikes: 95% of the projects in the last bear market disappeared, and even the hardest builders had no hope for the crypto world. The future of the encrypted world is still very promising, the bear market is only short-term, and the industry will move forward with technological progress in the future.
Nikita: Although many structural indicators of the bear market are the same, we clearly feel that this cycle has accelerated the implementation of application scenarios. I still remember the last company laying off 50% of its staff in 2019, retaining only the engineer position, and shifting the focus of the project to development. Many people left the cryptosphere in the last bear market, but not this time. People will see that the blockchain is also doing some good things, such as the innovation of Defi. There is finally a use case on Ethereum, or a decentralized “world financial center”. In this round, there are also many institutions that exploded and caused serious financial crises. I hope this kind of thing will happen less in the future. Users also need to be aware of the brutality of bear markets.
Q5: We can see that more and more projects are built on Layer 2. Balancer chooses Arbitrum, while 1inch chooses Arbitrum and Optimistic. How do you see the future of Layer2?
Mike: Regarding the competition between Optimistic and Arbitrum, I think that when Optimistic first started, the project needed to be whitelisted, which made it difficult to build an initial community. In contrast, Arbitrum is more friendly to project parties, which also makes its ecology generate native Defi activities. Of course, I’m also interested in ZK rollup. I think the rollup solution will drastically reduce fuel costs, and with that in mind many projects will change the way construction is deployed.
Nikita: I’m also very interested in rollups, and I’m a fan of Arbitrum. From the perspective of the community and developers, many things about Arbitrum are natively accumulated. In terms of transaction data, very few of Arbitrum’s audience use other Rollups or sidechains. If Arbitrum can maintain the core community, iterate on performance, and maintain network stability, its ecology will be infinitely bright in the future.
Q6: I would like to ask how the mainstream protocols manage their own treasury. Is there any potential danger due to improper management, and how should the project party deal with it? Which strategy will 1inch and Balancer use in managing their treasuries?
Mike: My idea is that being an on-chain protocol and its treasury is held by a centralized institution is inherently incorrect and unjust. From this point of view, the on-chain protocol must be audited and visualized, and the token holder can know the current financial situation of the treasury. From a Balancer perspective, we’re trying to keep the treasury money in different baskets. We need to understand how much money is for the pursuit of risk returns, and how much money is for the pursuit of stable returns. For example, 2% of the money needs to pursue risk and return. It will be open to various protocols and may be targeted by hackers. The rest of the money is mostly in the form of stablecoins.
Nikita: Regarding the Three Arrows Capital thing, there are debates inside and outside the team. 1inch’s treasury is controlled and managed by the DAO, with the multi-signature wallet Gnosis Safe playing a big role. DAO members can make proposals, update proposals, and vote on governance on how to manage the treasury. But many protocols on the market can’t do this, and even don’t have a substantive voting mechanism for a proposal. I think institutions need to be more transparent to incentivize developers to build more on-chain solutions in a more efficient and fair environment. For 1inch, our strategy is to read the proposals from the community frequently, and at least one a week for proposals involving important institutions and partners.