The previous story briefly introduced Klein Finance, a decentralized trading platform with unique merits such as high liquidity with low slippages and low impermanent losses. However, there are still some concepts to be discussed so that we can better understand what Klein Finance is like in the whole industry. Hence, this story will concentrate on the concepts of DeFi, NFT, and metaverse, and briefly on the industry pattern of public chains.
DeFi
DeFi represents decentralized finance, without relying on intermediaries such as banks, it can save the capital cost and time cost caused by complex intermediate links, it is open to anyone who can connect to the Internet, and has the characteristics of inclusive finance.
DeFi lending automatically executes the loan agreement with smart contracts, match the borrower and the lender, and transfers the assets immediately after the pledge is confirmed to complete the loan. Take the typical liquidity pool model as an example: when depositing, after the user deposits encrypted assets, he will get a deposit certificate, which is similar to a passbook. The deposit certificate can also be traded in the secondary market before it expires, which provides liquidity to such a deposit certificate.
The certificate will be recovered back to the platform during the withdrawal process, and the liquidity provider will be rewarded a native token of the corresponding transaction fee dividends together with the currency they deposited.
When borrowing, the deposit certificate is also the collateral provided by the user to borrow from the DeFi system. Applying to borrow from DeFi systems often requires over-collateralization, such as 150% pledge rate. However, the price of digital assets is constantly changing, and there is a margin call mechanism to maintain the stability of the whole DeFi system. Mortgage lending is the mainstream model of DeFi lending, allowing users to lend out other encrypted assets that need to be used urgently without selling their encrypted assets. However, the requirement of over-collateralization limits the utilization rate of funds, so there are also some unsecured DeFi lending solutions proposed and implemented.
Figure 1 : Total value locked in DeFi
Yield Farming
Yield Farminng is a key function of DeFi system, and it offers an applicable method for novice users to earn profits in DeFi system. As discussed in the previous paper, such a mechanism can motivate the users to deposit tokens on the trading platform to provide liquidity by rewarding them with native tokens and or transaction fee dividends.
For example, when users add liquidity to Klein Finance platform by depositing a certain type and number of tokens, they will get the KEN token (the native token of Klein) as a reward. The following is about the transaction mining model of Klein Finance.
Figure 2 : Klein Finance Yield Farming Model
TVL (Total Value Locked)
When it comes to the comparison among different DeFi projects, the TVL(Total Value Locked) used to be a useful index to evaluate the volume. However, with some obvious disadvantages and unavoidable limitations, some experts have been doubting the reliability of evaluating market values of DeFi projects by the TVL index.
According to Sam Bankman-Fried, the Chief Operating Officer of FTX, a crypto-asset derivatives exchange, TVL is completely meaningless as the DeFi project operators as the project operators can temporarily increase TVL through airdrop subsidies and many capital inflows are for liquidity mining, but mining cannot support the price. There is still no agreement about a better index or method to evaluate the market value of DeFi projects, and we will have further discussion about this topic in later papers.
GameFi
The GameFi project can be regarded as a combination of games and DeFi, and it provides a way to gamify the rules of DeFi programs. GameFi transforms game props into NFT assets, so that the virtual assets of the clients become the game props, and the users can earn profits by playing the games. Compared with traditional game projects, there are some obvious features for GameFi projects.
Figure 3 : Top 5 GameFi Projects by Cointelegraph
“Play to earn”
“Play to earn” mechanism: the highlight feature for GameFi projects. The players can develop hatching, upgrade and fight monsters in the game, get the pleasure of playing the game, and can also sell the obtained Tokens, equipment, and other NFTs in the trading market to gain profits. This improves the stickiness of users, and at the same time is very helpful for the improvement of the game ecosystem.
Ownership
The ownership revolution: In traditional games, players only have the right to use the game accounts, and all the assets and props in the game are controlled by a centralized game company. Under such a centralized system, it is very hard to value the game props as they are completely defined by a single company, and it is difficult to transfer the virtual assets within the game and cross different games.
However, in GameFi projects, players have rewarded digit assets that can be freely bought and sold on the chain. This guarantees the ownership of digital assets and reconstructs the relationship between game developers and players.
Ordinary users can directly participate in GameFi games, then they can obtain corresponding token rewards, pledge their rewards or digit props, and they can also invest in NFT tokens. Long-term investors can also invest such assets based on their expectations of the projects’ future development.
NFT
A non-fungible token (NFT) is financial security consisting of digital data stored in a blockchain, a form of a distributed ledger. The ownership of an NFT is recorded in the blockchain and can be transferred by the owner, allowing NFTs to be sold and traded. Unlike traditional copyright protection, the NFT certificate directly signs the content of the digital product and publishes the signature certificate on the blockchain ledger.
In this way, the NFT is permanently attached to the digital artwork, marking it as original, official, and unique. Buyers can have proof of authenticity and sole ownership through NFTs, even if replicas exist on hard drives and servers across the globe. NFTs provide a method of tokenizing ownership of natively digital assets.
Figure 4: Top NFT Coins by Market Cap
NFT is a protocol on Ethereum: ERC731. It has been existing for a long but only gained popularity since last spring. Some landmark events drove the development of NFTs.
A rookie game collectible card featuring legendary NFL quarterback Tom Brady was sold for a record $1.32 million.
Twitter CEO Jack Dorsey’s first tweet was sold for $2.9 million.
A 10-year-old rainbow cat meme was sold at auction for $580,000.
Of course, NFT can be applied not only in fired of art collections, instead NFT is a concrete tool for digital capitalization. It can be used to achieve the protection and liquidity of digit assets. It is the basic technology for the clearinghouse of digit assets, and it can be used to represent the interests of collaborative projects. Since the social events brought by the NFT art collection have strong dissemination and appeal, the application of NFT in the field of the art collection is conducive to promoting the development of the entire NFT industry.
Metaverse
The Metaverse refers to the next-generation Internet form derived from the integration of VR, AR technology, the Internet, games, and social networks. According to a long-term vision for the metaverse, people can switch their identities at any time and freely shuttle between physical and digital worlds, study, work, make friends, shop, travel, and more in the metaverse.
Economic activities are the most basic conditions for metaverse to operate. NFTs generated based on blockchain technology correspond to things in the real world, thus allowing users to obtain real digital ownership, which means that the digital world has the right to assets in the real world.
Web3.0 vs. Metaverse
Firstly we clarify the definition of Web3.0: Web3.0 refers to an idea for a new iteration of the World Wide Web-based on blockchain technology, which incorporates concepts such as decentralization and token-based economics. Web1.0 is considered the “readable” while Web2.0 is considered “writable”. Under these two website technologies, the users can freely use the Internet service and even earn some coupons, but the data of the users are not owned by the users themselves, making it difficult for the users to earn profits and enjoy the dividends of the whole network development. However, with the assistance of cryptocurrencies, on-chain assets, and smart contracts, Web 3.0 users can own assets both in the real world and in the metaverse.
Hence, blockchain provides the basic technical support for both Web3.0 and Metaverse, and both of them can represent the future of the Internet. Web3.0 is the future of technological development, and the Metaverse is the future of application scenarios and lifestyles. The two are mutually reinforcing and interdependent.
Figure 5 : The development of Metaverse
CEX, DEX, and Public Chain
Currently, there are three main types of trading routes: centralized exchanges (CEX), decentralized exchanges, and point-to-point OTC trading. CEXs are very similar to the traditional stock and commodity exchanges, except that blockchain technology will be applied during the cryptocurrency top-up and withdrawal process. There are obvious merits for such CEXS: the trading system is stable; the liquidity is good as the exchange is also acting as the market maker.
However, it sounds ridiculous to trade decentralized assets on centralized trading platforms, and some of the advantages of decentralization are lost in such a mechanism: the user information is not secured, and the CEXs may be attacked, causing losses to the users. With the assistance of smart contracts and AMM (Automatic Market Maker ), there are currently decentralized exchanges trying to solve such problems.
The main problem of DEXs is the poor user experience caused by a lack of liquidity. The main difference among DEXs is the gas fee, liquidity, and slippage which mainly depend on the public chain, and total value locked in the DEX and AMM mechanism. The idea of DEX is attractive and revolutionary, but the fact is the trading volume is far lower than that of CEXs. Figure1 and Figure2 show the CEXs and DEXs with top5 trading volumes respectively.
Figure 6 : Top 5 CEXs by Trading Volume
Figure 7 : Top 5 DEXs by Trading Volume
The total trading volume of DEXs is about 2.7 billion USD (for 24 hours till 22/June/2022), which is about 3% of the total global trading volume. So, we can conclude that the DEXs are still not the majority, but is potential due to the technical advantages. Also, among different DEXs, Uniswap (v3) has an absolute advantage in the DEX market share, and its transaction volume is 4–5 times that of the second place (Curve Finance).
In the early stages of DEX development, liquidity is critical. Striving to become the first echelon is very important for the development of the entire DEX project, but since the proportion of DEX in the entire virtual currency trading market is still very small, and the virtual currency trading market itself is also in a stage of rapid growth, DEX startups There is still a significant opportunity ahead, and early users and investors will have the opportunity to enjoy this bonus. Take KCC (KuCoin Community Chain) as an example, it is established by fans of KCS and KuCoin and is a distributed public chain based on Ethereum.
KCC introduced the proof of the Staked Authority (POSA) consensus mechanism, reducing the block confirmation time to 3 seconds to improve on-chain processing power and performance. At the same time, the KuCoin token (KCS) is the only gas for KCC to reduce transaction costs, thereby successfully achieving faster transaction confirmation speed, higher transaction performance, and lower transaction fees. KuCoin, as the 6th largest CEX by trading volume, has accumulated a large number of high-quality investors and digital asset holders, which is valuable for DEX on the corresponding public chain to accumulate the initial popularity.
Klein is the first DEX focusing on stablecoins and long-tail market transactions. It is designed to serve large-scale transactions of tokens including stablecoins, featuring safety, stability, low slippage, high liquidity, and low transaction fees. It also provides the users with token and transaction fee dividends as incentives. Having an efficient DEX on its public chain is of long-term strategic significance for a CEX: it can improve the comprehensiveness of its services, meet the needs of various customers, and increase the connection with customers.
Klein Finance is about to open beta this July, look forward to its great performance, and pay attention to its recent promotions!
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