In the principles of economics, market failure primarily stems from three factors: the first is the presence of externalities; the second is suboptimal market structures; and the third is information asymmetry. During the current bear market, the primary cause of DeFi market failure is information asymmetry.
In theory, DeFi’s primary function revolves around mitigating information asymmetry. Its permissionless nature, complete openness, and transparency endow DeFi with unparalleled levels of openness, transparency, and security within the current financial system. Moreover, the utilization of smart contracts automates transactions, thereby enhancing DeFi’s overall efficiency. Given these attributes, it might appear improbable for information asymmetry to be the primary cause of DeFi market failure.
However, a retrospective examination of the DeFi ecosystem since the DeFi Summer reveals a proliferation of misconfigured DeFi projects. These projects deliberately introduced complex financial products, convoluted business logic, and incentive mechanisms that obscured fatal flaws. This complexity fostered opacity and conveyed false price information to the market, culminating in a massive misallocation of funds catalyzed by information asymmetry. Ultimately, this led to the DeFi market’s collapse.
This article delves into the reasons behind the DeFi market’s faltering and endeavors to uncover potential solutions by dissecting L7DEX’s economic system.
Introduction to L7Dex
L7DEX is a decentralized perpetual contract exchange with the objective of offering users a more robust and seamless experience in decentralized perpetual and spot trading through innovative mechanisms. Within L7DEX ‘s overarching architectural framework, its economic system adheres closely to practical applications, providing essential impetus for various facets of development and catalyzing the effective growth of real-world business. This article examines L7DEX ‘s economic system to understand various scenarios contributing to DeFi market failure and explore potential solutions.
The Three Dominant Forces Undermining the DeFi Market
DeFi market failure can divided into three distinct scenarios.
The first scenario involves financial pseudo-innovations that deliberately hide critical flaws through intricate logic, code, and opaque product structures. These pseudo-innovations often employ the tactic of product accumulation to create opacity, concealing their underlying deficiencies and facilitating the predatory acquisition of funds and traffic.
In response to these futile and excessively complex innovations, L7DEX takes a different path, commencing with NFTs. This simplifies the economic system, returning to a more basic and genuine approach. Within L7DEX’s economic system, NFTs wield significant influence. They function as a standard for filtering genuine users and constructing communities based on users’ NFT holdings. Additionally, NFTs contribute to the value system; genuinely categorized users earn the platform’s token, LSD, based on their NFT holdings and staking. This process facilitates initial user incentives and the preliminary distribution of the platform economy.
The second scenario relates to platform tokens with unclear values ambiguous roles. These tokens often feature highly intricate and frequently changing governance rules, leading to the misguided allocation of substantial capital and exacerbating market failure.
Presently, most DeFi platform tokens serve governance functions, offering limited utility. However, they continue to attract considerable attention from traders. This situation presents challenges in evaluating the value of both governance and trading, intensifying information asymmetry.
We do not criticize this situation itself because it was an inevitable outcome of the market at the time. However, the underlying information asymmetry remains worth discussing. Within the framework of L7DEX, the platform token LSD is no longer a mere abstract concept; its value is now tangibly manifested through the economic system. The essential governance and trading functions remain intact, allowing users to engage in various facets of platform development through governance participation. By coupling NFT integration with ongoing product launches, LSD can acquire an early and relatively stable value representation.
The representation of value inherently takes on a multifaceted approach. With the introduction of new products, LSD is poised to become the cornerstone of liquidity for a wider range of high-quality projects. It will also evolve into a vital asset for users actively engaging in both primary and secondary markets. This progression will gradually establish a substantial real-time liquidity pool centered around LSD, fostering seamless connectivity between primary and secondary markets.
In the later phases of strategic roadmap, LSD will undergo assetization, positioning itself as the core asset for other projects. This strategic move will provide the market with a robust, fully blockchain-integrated, and exceptionally user-friendly investment vehicle. This transformation aims to dismantle the traditional information barriers often associated with project development, ushering in a new era of transparency, efficiency, and user-driven investment choices.
The third scenario revolves around the creation of seemingly secure but inherently high-risk assets through nested, complex structures, leading to erroneous interest rate signals in the market. These products leverage the open foundational settings of DeFi to expand the financial structure chain limitlessly, resulting in intricate combinations spanning multiple layers and incorporating dozens of tokens, thus forming highly opaque risk assets.
These multi-layered, packaged assets have led to price volatility and shattered confidence in both primary and secondary markets. As a result, substantial capital misallocation has occurred, and many high-quality projects have lost market funding support. In response to this challenge, L7DEX introduces a novel DeFi innovation concept, one that steers the economic system back toward clarity, simplicity, and efficiency.
As the core asset of L7DEX, LSD will gain effective empowerment through addition and subtraction within the economic system. Initially, real liquidity staking will restrict liquidity mining to align with business objectives, thereby eliminating the prevailing issue of excessive and empty liquidity mining. Subsequently, the platform’s IEO investments will further facilitate the assetization of LSD, promoting business growth and supporting other projects, thereby creating a meaningful impact on the market.
Furthermore, meticulous management and distribution of LSD, coupled with a global community and high-quality Web3 projects, will continuously expand the protocol’s scale. Finally, the synergy between the “PvP AMM” mechanism and the economic system will further reduce trading friction, lowering the barriers to user participation. With the assistance of smart contracts, there will be a significant improvement in token utility and regulatory execution rates. This approach aims to bring the platform’s asset utilization back to a state of simplicity and purity, establishing a genuinely transparent asset with clear valuation logic, as opposed to perpetuating the expansion of opaque leveraged assets.
In Conclusion
DeFi market failure primarily arises from human greed and fear. However, in the face of these challenges, exploratory initiatives like L7DEX inspire a return to fundamental principles and prompt us to reconsider the current market landscape. Lessons learned from failures do not signify the demise of hope but rather underscore the significance of continuous efforts and experimentation. Over time, these endeavors will usher in a more transparent, secure, and economically sound DeFi market.
Website: https://www.l7dex.finance/
Twitter: https://twitter.com/L7_DEX
Telegram: https://t.me/L7DEX_Official
Discord: https://discord.gg/l7dex
Media ContactCompany Name: L7 LabsContact Person: LucasEmail: Send EmailCountry: United Arab EmiratesWebsite: https://www.l7dex.finance/
