From DeFi 1.0 to DeFi 3.0
As the engine of the previous bull market, DeFi has gradually become one of the most important components of the cryptocurrency market. Throughout this process, DeFi has gone through several iterations, which can be simplified as DeFi 1.0, DeFi 2.0, and DeFi 3.0.
1. DeFi 1.0: Liquidity Mining
In DeFi 1.0, the protocols and blockchain projects themselves needed to create liquidity to generate market interest and raise funds. The most common strategy was to use liquidity mining as a reward program for early participants.
Liquidity mining refers to users providing an equal amount of tokens for each token in a trading pair to qualify for earning liquidity provider (LP) tokens and high annualized returns (APY). These returns are typically paid out in newly minted native tokens.
Therefore, the essence of DeFi 1.0 was to leverage the liquidity provided by third-party whales and promote decentralized market transactions.
However, as the practice of whales manipulating mining, withdrawing, and selling intensified, more liquidity providers joined the pool, causing the annual interest rates to inevitably decline rapidly. This situation also gave rise to numerous mining difficulties. To address these issues, developers conducted more aggressive experiments and ushered in the era of DeFi 2.0.
2. DeFi 2.0: Protocol-Owned Liquidity and Inflation (High APY)
Olympus DAO was the most prominent protocol before DeFi 2.0. Instead of relying on liquidity mining to attract liquidity, Olympus DAO disrupted the traditional DeFi liquidity model by leveraging the concept of protocol-controlled value and innovative staking mechanisms.
But as the "Zuo Zhuan" once said, "What rises must fall." Olympus DAO's excessive reliance on the (3,3) model ultimately led to its downfall, plunging it into the death vortex of DeFi 2.0.
3. DeFi 3.0: Agreement-Supported Liquidity
In DeFi 3.0, protocols set a certain percentage of transaction fees. The majority of these fees are typically used for token buybacks and burning, while the remaining portion flows into the protocol's treasury. The protocol then engages in farming activities based on defined strategies. The profits generated from farming are used to repurchase tokens, reducing the supply to maintain token price stability, or rewarding token holders through airdrops. Additionally, token holders can earn a certain percentage of transaction fees as rewards.
Represented by Olympus (OHM), DeFi 2.0 (protocol-owned liquidity) primarily addressed the capital efficiency issues of DeFi 1.0. DeFi 3.0 further professionalizes the Yield Farming business by implementing specific farming strategies to generate profits and redistribute them to token holders. This "Farming as a service" aims to lower the entry barriers for ordinary investors and increase farming returns.
Challenge is Coming
Despite continuous innovation and development in the DeFi space, over the past two years, accompanied by the volatile price of on-chain assets, people have inevitably developed a sense of caution towards DeFi. Additionally, with the bear market's impact, trading in the DeFi market has experienced significant declines, and Total Value Locked (TVL) has been greatly affected.
At the same time, DeFi itself has relatively high entry barriers and is not user-friendly for ordinary users. For example, participating in farming in DeFi requires setting slippage tolerance, forming LP (liquidity pool), staking, understanding impermanent loss, and investing a significant amount of time to research and discover new liquidity pools to achieve high APY returns. In this process, users also face various potential risks, such as mining difficulties caused by large holders, project teams abandoning the project, and high risks associated with on-chain operations.
In this scenario, the DeFi market undoubtedly needs valuable on-chain assets as a value support to rekindle people's confidence.
Merlin Protocol: Providing Value Support to the DeFi Market through Hashrate NFTs
Merlin Protocol is a mining power NFTization platform and a foundational protocol for mining power financial derivatives. Its business modules include the issuance of mining power NFTs, standardization of Bitcoin hashrate assets, and decentralized financial derivative protocols based on hashrate assets. Merlin Protocol aims to solve the long-standing issues of standardization, liquidity barriers, and related moral risks in the cloud mining market through technical specifications, risk management, and ecosystem incentives.
Merlin Protocol's approach involves bringing real-world assets into the Web3 world through oracles and NFT technology. To achieve this, Merlin extends ERC-721 and creates a leasing liquidity pool protocol based on an Automated Market Maker (AMM). It automatically matches leasing orders without intermediaries, addressing the issue of underutilized funds in the NFT market. It also satisfies the leverage demand for high-quality NFTs to some extent, providing a new DeFi solution for Real-World Assets (RWAs).
The Merlin Protocol team has extensive experience in mining, finance, and blockchain technology, and they aim to break the current situation where hash power is monopolized by large miners. Users can acquire mining rights similar to miners by purchasing their Hash NFTs and gain access to DeFi liquidity.
1. Hash NFTs
Hash NFTs are the first RWA-based NFT products issued by Merlin Protocol. Through smart contract technology, the entire process of investing in hashrate, including presale, observation period, delivery period, and end period, is implemented on-chain. The contract automatically settles funds and delivers outputs based on oracle status to ensure a transparent settlement process and prevent asset misappropriation. This allows NFT holders to enjoy the same investment returns as real-world miners.
2. Merlin Lease Pool
Hash NFTs partially address the DeFi market's demand for stable assets that generate sustainable income. Moreover, Hash NFTs can also be used in various areas of DeFi, such as staking and lending.
Due to the involvement of real-world asset delivery, a leasing business model that only involves rights and income rights is more suitable for RWA applications. Therefore, Merlin chooses to enter through a leasing agreement and has developed a decentralized leasing protocol called the Lease Pool.
The Merlin Lease Pool provides a public leasing liquidity pool where tenants and lessors can interact with leasing orders in the pool. Dynamic rent is generated in real-time based on supply and demand within the pool, and tenants can share in the rental income generated by the pool.
Technological Highlights of Merlin Protocol
1. Future Revenue Prediction and Standardization
Taking Hash NFTs as an example, the protocol calculates future cash flows for the issued hashrate asset package and specifies standardized output settlement rules. Each NFT represents a predetermined n/T hashrate for the specified expiration date. Investors can enjoy mining rewards generated by the designated hashrate without the need for comprehensive mining operations.
2. Credit Rating and Risk Control System
Merlin Protocol integrates a decentralized credit rating system into its risk management toolkit, strengthening the standardized value dividend in the market.
3. Multi-Chain Support
Merlin Protocol believes that hashrate assets are fundamental assets in the crypto world and should naturally possess multi-chain attributes and cross-chain interoperability. Therefore, in addition to being deployed on the Ethereum network, the Merlin DApp will also support BSC, Avalanche, Solana, and Matic.
4. Hashrate Binding Mechanism
Merlin Protocol allows the binding of specific hashrate resources to existing NFTs (e.g., from third-party NFT projects), and NFT holders will receive income from the underlying hashrate.
The Merlin binding protocol decentralizes cryptocurrency mining power, enabling it to be bound to any NFT in any project wallet.
5. Decentralized Leasing Protocol
Merlin Protocol enables the leasing of NFT assets. Tenants can lease NFTs from the protocol and participate in DeFi staking, GameFi mining, and other income-generating activities.
The protocol adopts a leasing commission model that dynamically generates rental income based on market supply and demand, making it more liquid than traditional order-based leasing systems.
Merlin Protocol introduces Bitcoin hashrate as a relatively stable and secure asset into DeFi applications as underlying assets through tokenization.
On the one hand, it captures the underlying value of Bitcoin hashrate and provides liquidity to it.
On the other hand, DeFi can incorporate Bitcoin hashrate as a real and highly recognized underlying asset, even though it is not directly related to DeFi protocols. This asset can play a significant role in trading, staking, and other activities.
Bitcoin hashrate is widely known as an extremely stable and high-quality asset in the entire crypto field. While the price of Bitcoin may fluctuate, its hashrate can still generate relatively stable and predictable future cash flows. Particularly when measured in Bitcoin, future returns can be more reliably assessed.
Additionally, Bitcoin hashrate is based on physical assets such as machines and facilities, giving it real-world value that many purely on-chain assets cannot replace.
Hashrate NFTs undoubtedly unlock the hidden value within the Bitcoin system. The tokenization of Bitcoin hashrate reflects the tokenization and present value of the value yet to be issued by Bitcoin. As the market value of Bitcoin expands, the value of the unmined portion will also increase.
Furthermore, Bitcoin hashrate has low correlation with mainstream public chain DeFi ecosystems. This means that the value of DeFi protocols may benefit from support for Bitcoin hashrate tokens, but the tokens will not fluctuate with the volatility of DeFi protocol values.
In conclusion, the tokenization of hashrate is indeed a market with considerable potential. And Merlin Protocol currently provides a relatively efficient and reliable solution. This will have a significant driving effect on the DeFi market.