Starting from history, look at the past, present and future of DeFi

Original author: Jacub

Compiler: Captain Hiro

Original source: Babbitt

Decentralization What is Finance (DeFi)? Where did it come from? What are the memorable things in the DeFi field in 2020? Where does its future go? You will find the answers to the above questions here.

Let's start from the beginning.

Decentralized finance has no specific birth date, but Some important historical events have made the emergence of DeFi possible.

Bitcoin

The first important event was that Satoshi Nakamoto invented it in 2009 bitcoin.

Whether Bitcoin should be classified as DeFi or not, its birth is a key driver of the entire cryptocurrency industry, and decentralized finance is the cryptocurrency part of the industry.

Bitcoin allows users to make payments around the world in a decentralized way, and the payment field belongs to finance, so in my opinion, Bitcoin is also Can be regarded as DeFi.

But most importantly, Bitcoin backs Ethereum The creation of DeFi, which is the default blockchain for all top DeFi protocols.

Ethereum

As cool as it is for people to send bitcoins around the world, finance It doesn't stop there.

Every sound financial system requires a range of other important services, such as lending, trading, financing or derivatives.

Bitcoin's language (called script) is relatively simple and limited, and it is not suitable for deploying the above-mentioned applications. The limitations of the Bitcoin language are one of the most important factors that contributed to Vitalik Buterin's creation of Ethereum.

Ethereum was launched in 2015 and quickly began to attract more and more developers who wanted to build all kinds of decentralized applications, from games, Such as CryptoKitties, to financial applications.

With the stability of its Turing-complete programming language and the ERC20 standard for creating new tokens, Ethereum quickly became a smart contract platform on which to build.

Maker

This reminds us of one of the oldest DeFi projects on Ethereum One - Maker.

Maker is a protocol that allows the creation of a decentralized stablecoin DAI. The project was created in 2014 by Rune Christensen, who was inspired by BitShares, another blockchain project created by Dan Larimer.

Venture Capital funded the development of Maker and the project finally launched in late 2017. The first iteration of the protocol was single-collateralized DAI (supporting only ETH as collateral). This initiative was later extended to Multi-Collateral DAI, which launched in late 2019.

Maker remains one of the most important projects in DeFi and clearly one of the pioneers in the entire decentralized finance space.

EtherDelta

Another project worth mentioning is the very popular 2017 EtherDelta .

EtherDelta is the first decentralized exchange (Dex) built on Ethereum, allowing users to exchange ERC20 tokens without permission.

The exchange is based on an order-book. As we know, building order ledger exchanges at layer 1 is difficult, which often results in a poor user experience. Nonetheless, especially in the era of ICOs, EtherDelta is one of the most popular exchanges for trading different ERC20 tokens.

Unfortunately, the exchange was hacked at the end of 2017. Hackers gained access to EtherDelta's front desk and proxy traffic to a phishing site that eventually defrauded users of approximately $800,000.

In addition, the founder of EtherDelta was also The Securities and Exchange Commission (SEC) accused it of operating an unregulated stock exchange in 2018, which dealt a fatal blow to Maker.

ICO

Also in 2017, one of the first significant use cases for Ethereum ICOs (Initial Coin Offerings) are all the rage.

Instead of raising funds using traditional methods, new projects have started offering their own tokens in exchange for ETH. While the idea of decentralized finance is sound in theory, multiple hyped projects have raised massive amounts of money without even a few pages of white papers.

Among the large number of ICO projects, there are also many projects that we classify as DeFi today.

The most famous DeFi projects in the ICO era are:

Aave -Lending

Syntix (formerly known as Havven) - a liquidity protocol for derivatives

REN (formerly Republic Protocol) - a protocol that provides liquidity access between blockchains

Kyber Network - on-chain Liquidity Protocol

0x  - an open protocol that allows peer-to-peer exchange of assets

Bancor - another on-chain liquidity protocol

< /p>

Interestingly, despite the notoriety of the 2017 ICO boom, some of the projects that emerged then are now considered the top protocols in DeFi.

A major breakthrough at the time was to let users interact with smart contracts that contained funds shared by multiple users, rather than interacting directly with other users.

This creates a new "user-to-contract" model which is more suitable for decentralized applications as it does not require That much interaction with the underlying blockchain.

After the ICO craze ended and the bear market began, DeFi experienced a relatively quiet period of development. But in fact, some major DeFi protocols are being intensively built during this time.

I usually refer to this period as the "pre-COMP period".

We’ll see later why Compound’s COMP liquidity mining is a major breakthrough for DeFi.

Before we discuss this issue, let’s explore some other important agreements and events during the quiet period of DeFi development. in time.

Prior to COMP

On November 2, 2018, the initial version of Uniswap was released to Ethereum mainnet. It was the culmination of more than a year of work by its creator, Hayden Adams.

Uniswap is clearly one of the most important projects in the DeFi space. Unlike EtherDelta, Uniswap is built on the concept of liquidity pools and automated market makers (AMMs). It again leverages the user-to-contract model discussed earlier.

The first version of Uniswap is fully funded by the Ethereum Foundation.

In July 2019, another important event happened. Syntix launched the first liquidity incentive program, which later became one of the key catalysts for DeFi Summer 2020.

In addition, several other DeFi projects launched their protocols on the Ethereum mainnet during 2018-2019. These include Compound, REN, Kyber and 0x.

Black Thursday

On March 12, 2020, due to the global The price of ETH dropped sharply by more than 30% in less than 24 hours.

This is one of the biggest stress tests of the still-nascent DeFi industry. Gas fees on Ethereum rose dramatically to over 200 gwei (really high at the time) as multiple users attempted to add collateral to different loans or attempted to transact between different assets.

One of the protocols most impacted by this incident is Maker. The tide of liquidation caused by the depreciation of ETH mortgaged by users has led to Keeper bots (external players responsible for liquidation) buying ETH through 0DAI. This resulted in a roughly $4 million ETH shortfall, which was later remedied by creating and auctioning additional MKR tokens.

Of course, even though an event like Black Thursday may be quite serious, its appearance has made the entire DeFi ecosystem stronger, and its anti-fragile capabilities are getting stronger and stronger. powerful.

The main period of DeFi development-"Summer of DeFi" followed.

Summer of DeFi

The main catalyst for Summer of DeFi is the launch of Compound in May 2020 COMP token liquidity mining project.

DeFi users start earning rewards for lending and lending on Compound. Additional incentives, in the form of COMP tokens, lead to a massive increase in the APR of supply and lending of different tokens. This also facilitates the development of Yield Farming, as users can constantly switch between borrowing and lending different tokens to obtain the best yield.

This incident also spawned a wave of other protocols distributing their tokens through liquidity mining and creating more and more Yield Farming Chance.

It also creates Compound governance, where users using COMP tokens can vote on different proposed changes to the protocol. Compound’s governance model was later reused by several other DeFi projects.

Another major DeFi protocol, Yearn Finance, was born on this wave.

This project is a revenue optimizer developed by Andre Cronje in early 2020. It focuses on improving DeFi's ability to make money by automatically switching between different lending protocols to max.

In order to further decentralize Yearn, Andre decided to distribute the governance token YFI to the Yearn community in July 2020.

YFI tokens are distributed entirely through liquidity mining. It has no venture capital, no investor rewards, and no development rewards. This model has attracted a lot of support from the DeFi community, and funds worth more than $600 million have flowed into the liquidity pool.

YFI tokens were priced at around $6 when they first went live on Uniswap, and less than 2 months later each token was worth more than $3 Ten thousand U.S. dollars.

Like all groundbreaking projects in DeFi, Yearn's success was quickly followed by other teams launching similar projects, only It is made some minor changes on the basis of the original project.

Another project that is starting to gain more and more attention due to its unique elastic supply model is Ampleforth.

This model was quickly borrowed and iterated by Yam, another DeFi protocol.

After just 10 days of development, "Yam" launched on August 11, 2020.

YAM tokens were distributed in the spirit of YFI, and the protocol soon began attracting significant liquidity.

The protocol aims to reward COMP, LEND, LINK, MKR, SNX and YFI holders for staking their tokens on the Yam platform. Continue to attract traffic from the DeFi community.

Only a day after the protocol locked $500 million in total value, the rebase mechanism discovered a serious flaw. The bug only affected a subset of Liquidity Providers (LPs) in one of the pools (yCRV-YAM), and they later tried to relaunch the protocol, but it was enough to turn off interest in Yam.

SushiSwap followed. Released by an anonymous team at the end of August 2020, the protocol introduced the new concept of Vampire Attack, with the aim of sucking away Uniswap's liquidity.

By incentivizing Uniswap's liquidity providers with Sushi tokens, SushiSwap is able to attract as much as $1 billion in liquidity.

After SushiSwap lead developer ChefNomi sold all his SUSH tokens, the protocol finally moved a lot of Uniswap's liquidity to their new platform .

Summer of DeFi has launched many projects of varying quality. Most of them are just iterations of existing open source projects trying to benefit from the excesses of an entirely new industry.

After "Yam" and "Sushi", there are many projects named after different kinds of food are being launched. Such as Pasta, Spaghetti, Kimchi, HotDog, etc. Almost all projects fail after a day or two of attracting a lot of attention.

The final big event of DeFi Summer is the launch of Uniswap token UNI. All previous Uniswap users and liquidity providers received airdrop rewards worth over $1,000. In addition, Uniswap launched a liquidity mining project in 4 different liquidity pools, attracting more than $2 billion in liquidity. Most of them were snatched back from SushiSwap.

In DeFi All key metrics for DeFi improved significantly during the summer of 2020.

Uniswap's monthly turnover rose from US$169 million in April 2020 to US$15 billion in September 2020, a substantial increase of nearly 100 times.

The total value locked in DeFi rose from $800 million in April to $10 billion in September, an increase of more than 10 times.

The number of bitcoins transferred to Ethereum tripled from 20,000 in April to nearly 60,000 in September.

DeFi Winter

Of course, from In the long run, the DeFi boom is unsustainable. In early September 2020, market sentiment took a sharp turn for the worse. Major DeFi tokens began to lose value rapidly. The income from liquidity mining from the value of distributed tokens has also become lower and lower, and the winter has come.

Throughout September and October, negativity persisted, although the DeFi ecosystem remained very active and developers continued to build new DeFi protocols.

The DeFi market finally bottomed out in early November, with some top DeFi protocols down 70-90% from their all-time highs just a few months ago.

After a rapid rebound of more than 50%, the DeFi market has begun to show an upward trend again.

Interestingly, in the DeFi winter, Uniswap capacity is still much higher than it was in early 2020. Additionally, the total value locked in DeFi has been on the rise towards the end of the year, surpassing $15 billion.

Of course throughout 2020, the DeFi industry has been plagued by various hackers, such as bZx, Harvest, Akropolis, Pickle.

At the end of 2020, as Bitcoin broke through the all-time high of 2017, it seems that DeFi is preparing for a new round of parabolic upward trend.

Future Outlook

Looking to the future, DeFi The future is bright.

DeFi developers are constantly building new and innovative projects.

Ethereum 2.0, layer 2 solutions, and even other blockchains will also scale. This will allow a new set of users to start participating in DeFi. It will also help discover new use cases that were previously impossible due to high network fees.

Bringing new, more traditional assets into DeFi through tokenization or creating synthetic versions of them will also open up entirely new opportunities.

Competition between DeFi on Layer 2, DeFi on Ethereum 2.0, DeFi on Bitcoin, and DeFi on other chains will also play important role. Interoperability protocols and cross-chain liquidity could become very important.

Other areas, such as credit authorization and low or no collateral loans, are also being explored.

This will all start to become clear in 2021.

So, what is your favorite part of the history of decentralized finance? How do you think the field will evolve in 2021?

Original link

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia