If you pay close attention to recent news from the US, you will find that the US has started to make "small moves" again. Whether it's CFTC Chairman Paul Atkins or legislators promoting crypto legislation, they have frequently mentioned DeFi (decentralized finance) recently, occasionally emphasizing the need to "protect DeFi innovation" and even claiming that "DeFi aligns with the American spirit". But for us "smart people", just a little serious research into the not-so-long history of the US can reveal that these slogans are just a way to "get by". The US's sudden push for DeFi is certainly because it is "very profitable". Through in-depth research, we find that the content behind DeFi is complex and far-reaching, crucial for the future of global finance. Today, we will comprehensively analyze DeFi, exploring why it is so profitable and the true motives behind the US's strong support for DeFi.
What is DeFi?
DeFi, short for decentralized finance, simply refers to a financial system built on blockchain technology. We are not unfamiliar with traditional financial systems; banks, stock exchanges, PayPal, Alipay, etc., all belong to the financial system, whose core is to provide services related to money. These services can be subdivided into three categories:
Accounting services: Capable of efficiently and reliably recording who has how much money and who owes whom.
Value transfer services: Simply put, this is about transferring money, helping people move funds from one party to another.
Risk pricing and resource allocation services: This is a derivative business of finance, addressing how to direct idle funds to where they are most needed. For instance, your savings can flow through loans to those in demand, they pay interest, and the money can achieve "appreciation".
All financial innovations ultimately revolve around these three questions, seeking more efficient tools to solve them. So, what kind of tools can be considered advanced? The answer is: the higher the degree of automation, the more advanced it is. Just like washing clothes, from hand washing to smart washing machines, and then to future household robots, the higher the degree of automation of the tools, the higher the efficiency. The financial system is no different; advanced financial tools allow people to do less work, thus naturally increasing efficiency.
Why is DeFi efficient?
The main reasons why DeFi is more efficient than traditional finance are twofold:
Automated execution: DeFi standardizes many financial links and automates execution through smart contracts, reducing manual intervention.
Unified ledgers: All transaction, mortgage, loan, and transfer records are stored on the blockchain, with data unified, open, and transparent, greatly improving efficiency and credibility.
In simple terms, DeFi is like a "smart washing machine", only it is a more efficient financial tool. Its business implementation logic is not much different from that of smart washing machines.
The business implementation of DeFi: An analogy with washing machine sales systems.
The business expansion of smart washing machines is usually divided into three sectors: headquarters, regional managers, and distributors. The business implementation of the financial system has a similar structure, divided into central, local, and offshore sectors. Taking the US financial system as an example:
Central sector: Equivalent to a company's "headquarters", including the Federal Reserve, CFTC, Senate Banking Committee, etc., responsible for formulating financial strategies, with the core product being the US dollar.
Local sector: Similar to regional managers, referring to financial institutions in various US states, subject to unified management by the central authority.
Offshore sector: Similar to distributors, referring to users and institutions outside the US, smaller in scale and more dispersed.
Whether for users or business owners, the biggest demand is to "remove intermediaries", as intermediaries will earn the price difference, increasing costs. The US financial center also has a similar goal: to concentrate all user resources at the center for management, reducing dependence 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 do without distributors and could not sell products directly to remote areas.
Historical review: From manual finance to internet finance.
Before the 1970s, the US dollar, as a "new product", needed gold as backing (35 dollars for 1 ounce of gold). At that time, financial tools were very primitive, such as stocks being printed on paper, and transactions were cash on delivery. The origin of the New York Stock Exchange can even be traced back to a sycamore tree at 68 Wall Street, as it was a cool place suitable for trading.
Due to outdated tools, the management capacity of the US financial system is limited, and customer development relies entirely on local distributors (state banks, exchanges, insurance companies). These distributors rely on manual accounting, which is inefficient and often leads to loss of money and account errors. In 1968, the New York Stock Exchange "collapsed" due to excessive trading volume (an average of 15 million shares, about 150,000 transactions daily), as manual processing simply couldn't keep up.
Despite the inefficiency, distributors have made a fortune, and local exchanges have even made many people overnight millionaires. It was not until the rise of internet technology that things began to change. In 1973, the US established the National Securities Clearing Corporation (NSCC, later renamed DTCC), introducing a computer-based settlement system that greatly improved efficiency. The central authority required all financial institutions to adopt a unified settlement system, centralized data management, which improved efficiency and reduced errors.
The popularity of the internet has further driven the development of mobile payment and other services, benefiting both central and users, but intermediaries have found it hard. Local financial institutions have gradually been consolidated, with Nasdaq being a typical example. It initially was a private company providing electronic management systems for local exchanges, but later expanded its business, connecting all US exchanges, and was eventually "acquired" in 2006, becoming a nationally certified exchange.
Why is the US strongly promoting DeFi?
Today, the domestic financial market in the US has basically achieved "disintermediation", but the offshore financial market (which holds two-thirds of the world's dollar assets) remains an enticing "fat piece". In the past, the US could not fully control the offshore market because offshore banks were small in scale, numerous, and had inconsistent records, making regulation very difficult. The emergence of blockchain technology has changed this situation.
All transactions on the blockchain are open and transparent, with unified data. The CEO of Visa has stated that the market for dollar stablecoins is mainly overseas, rather than domestically in the US. The CEO of Tether has also pointed out that financial efficiency within the US has reached 90%, and the potential for improvement with the introduction of stablecoins is limited (at most to 95%); however, in the offshore market, financial efficiency is only 10% - 12%, which can be improved to 50% with the introduction of stablecoins, presenting huge potential.
Therefore, as a tool, the goal of DeFi is to recruit offshore financial users. The US aims to centralize control over the offshore market by leading the DeFi ecosystem (including regulation, infrastructure, asset types, etc.). For example:
Regulatory level: Dominated by US institutions (such as CFTC, OCC).
Corporate level: The US controls the DeFi ecosystem through acquisitions (such as Circle) or supporting compliant teams.
Infrastructure: Traditional banks and exchanges act as custodians and participate in DeFi infrastructure construction.
Asset types: According to upcoming legislation, on-chain assets will include stablecoins, digital commodities, digital securities, etc.
User level: Traditional exchanges and brokerages will also participate in on-chain business to attract more users.
Comparing it can be found that in the past, the US's control over the offshore market was limited to infrastructure and user access, whereas with DeFi, almost every level can be directly managed by the US. DeFi is not only "decentralized", but also "disintermediated", weakening the interests of intermediaries, while also being "dereguled"—but what is removed is the regulation from other countries.
Risks and opportunities
Risk
The popularization of DeFi will have a tremendous impact on the offshore financial market. Offshore financial centers like Dubai, Singapore, and the Cayman Islands may gradually be eroded, just as the US has integrated 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 rather than USD.
Furthermore, if the US launches a crypto-friendly ICO (Initial Coin Offering) registration process, companies may no longer choose traditional listings but instead directly issue tokens for financing. Small enterprises that previously opted for listings on the Hong Kong stock exchange or in Singapore may turn to the US stock market for token issuance to enjoy higher liquidity. This will lead to a decline in the attractiveness of offshore exchanges, and investors will need to be cautious about the small stocks of these exchanges.
Opportunities
In the face of significant policy changes, companies that align with US thinking will seize opportunities. Here are some examples:
Stablecoins: Circle (the issuer of USDC) has closely collaborated with US regulators from the very beginning, showing excellent stock performance, even though its scale is smaller than Tether. Although Tether has been slow to react, it is also working hard to catch up.
Public chains: Ethereum promotes the on-chain stock protocol, while Solana actively aligns with US policies (such as holding annual meetings in New York), both vying for US support.
Exchanges: Coinbase is deeply integrated with the US from infrastructure to asset levels, having launched USDC and providing third-party custody services. Although its trading business is not as strong as its competitors, its non-trading business has performed robustly, potentially making it the biggest winner in market consolidation.
Investment advice
The key to investment is "those who follow the trend thrive, those who go against it perish". It is essential to choose companies that align with US policies, prioritizing those that are "quick to react", such as Circle, Coinbase, etc. However, in terms of long-term competition, it is still necessary to examine the companies' own strengths, including user scale, profit levels, and innovation capabilities.
Summary
DeFi, this "naive youth" born from freedom, has now been "armed" by the US, becoming an important tool in its financial strategy. It not only achieves decentralization and disintermediation but also clears obstacles for the US in the global financial game. On the historical stage, the story of DeFi is just beginning, and we are merely passersby; only by clearly understanding trends can we find our position in this financial business war.
(For those who heard this, a thumbs up! This content may be a bit dry, but you have already seen the essence of the DeFi market. How will it impact you and me in the future? Let’s wait and see!)
