Partnered With:

Looking back at the development history of DeFi before Uniswap

Read this article in 26 Minutes

In September 2016, Nick Johnson proposed the concept of a decentralized exchange called Euler. In June 2017, EtherDelta went online and became the first Ethereum decentralized exchange recognized by the regulatory authorities. In 2017, BancorProtocol and

Original Title: "A Study of the History of DeFi: Development of DeFi Before Uniswap"

Original Author: 0xKooKoo, Geek Web3 & MoleDAO Technical Advisor, Former Bybit Technical Director

Introduction

Most people came into contact with DeFi during the DeFi summer of 2020, and I think there are several reasons why DeFi suddenly became popular:

No need to rely on third parties. Like Bitcoin, DeFi does not require any third-party dependencies (except for Oracle). Users only need to access the encrypted wallet and sign to achieve on-chain transactions. As long as the smart contract is secure, no one can take away the user's assets. Not your key, not your coin. I believe that old leeks who have experienced the Mt.Gox theft incident and new tragic players who have experienced the FTX misappropriation of user assets can better understand this feeling of lack of trust.

Increased market demand. Prior to DeFiSummer, there was a huge demand for liquidity worldwide, with low interest rates in traditional financial systems and global liquidity easing policies leading to a search for higher-yielding opportunities. DeFi provides a viable alternative, attracting a large influx of funds with higher interest rates and more investment opportunities.

Better protection of personal privacy. DeFi does not require or only requires minimal KYC. DeFi platforms are built on blockchain technology and execute transactions and protocols through smart contracts. Unlike traditional financial institutions, DeFi does not have a centralized management organization or intermediary, but is automatically executed by code and protocols. This decentralized feature makes it impossible for DeFi platforms to directly collect and manage users' personal identity information, so they cannot perform the common KYC procedures in traditional financial institutions. There are indeed many pure on-chain alpha opportunities, and those who can seize these opportunities are professional players. Professional players do not want to expose their strategies and personal information, so DeFi is indeed the best choice for this group of players.

Lower threshold, Permissionless. DeFi does solve some of the problems and shortcomings in the traditional financial system to some extent, such as anyone can list your token on Uniswap, which greatly improves the breadth of transactions. As long as people have a trading demand for a certain token, it can be satisfied on DeFi without waiting for a centralized exchange to go through multiple reviews and choose to list it.

Code Audibility. DeFi projects are usually open source, and their smart contract code can be audited and verified by anyone. This openness and transparency allow people to inspect the code and ensure that there are no hidden malicious behaviors or risks. In contrast, the backend programs of traditional financial institutions are relatively closed source, and people cannot directly audit their internal operations.

High interoperability. Different protocols and platforms in the DeFi ecosystem can connect and collaborate with each other, forming a seamless financial network. Because of this, the DeFi community tends to adhere to the principles of openness and interconnectivity to promote more innovation and development.

However, DeFi also has some issues:

缺乏流动性。Compared with the liquidity of centralized exchanges, DEX still has a lot of room for improvement. According to the latest data from theblock.co on October 16, 2023, the spot trading volume of DEX in the past month was only 13.45% compared with that of CEX. In addition, the lack of liquidity brings the problem of excessive transaction slippage. For example, in CEX, 1500 USDT can buy 1 tokenA, but in the liquidity pool on a chain with poor liquidity, the same 1500 USDT can only buy 0.9 tokenA, and the transaction is equivalent to a 10% drop.

High transaction fees. DeFi transactions are conducted on the blockchain, so they are subject to the performance and storage space of the underlying public chain. For example, transaction fees on Uniswap may skyrocket due to congestion on the Ethereum mainnet. I have personally experienced a regular transaction being charged a whopping $200 in fees, which was really discouraging.

Less functionality. Compared to the extensive services offered by centralized exchanges, such as grid trading, investment robots, wealth management products, and other customized services, DeFi's current business is still very basic and decentralized, with only simple swap trading, liquidity mining, staking, farming, etc.

Poor user experience. The user experience of DeFi is much worse than that of mature CEX. For example, it takes several seconds to complete a transaction, the signature content is not direct, the terminology is not unified, and the product flow logic is not smooth. However, this problem is still manageable because as long as standards are gradually unified, many front-end codes and product logics can form mature and easy-to-use templates, and then all companies will be more or less the same.

History of DeFi in the Past

It can be said that since the birth of BTC, people have hoped to trade in a decentralized way, and there have been many innovations in on-chain finance. Due to the weak programmability of BTC, people did not think too much about this direction. Later, Ethereum emerged, and the imagination space was opened up. Many projects adopted the form of ICO to raise funds.

With the establishment of the ERC20 protocol, the flow of on-chain assets has become more abundant, leading to a series of innovative financial products emerging.

Next, let's go on an archaeological journey to see the difficult journey that DeFi has gone through, and which products and celebrities have made remarkable innovations.

The earliest discussion about decentralized finance can be traced back to July 2013, when JR.Willett, the founder of Mastercoin, launched the first ICO on the bitcointalk forum and declared that only those who participated in the donation could enjoy new features such as decentralized transactions and distributed betting that were superior to Bitcoin. This also enabled him to successfully raise 4,740 bitcoins, worth $500,000 at the time.

In 2014, Robert Dermody and others jointly founded the Counterparty Protocol, which is a peer-to-peer financial platform and distributed open source network protocol built on the Bitcoin blockchain.

The problem it solves is: allowing users to create their own tokens on the Bitcoin blockchain. Counterparty has a native currency called XCP, which is produced from Bitcoin through the "proof-of-burn" mechanism.

Counterparty provides financial instruments such as derivatives that Bitcoin cannot provide. Overstock.com once used Counterparty to trade securities on the blockchain. Counterparty also created a decentralized asset exchange where various digital assets can be traded. Users can use the counterpartyd node software and Counterwallet web wallet to use Counterparty.

Counterparty has implemented something similar to smart contracts and dapps on Bitcoin. It also provides an open-source and decentralized platform for conducting financial activities without relying on any central authority. Several well-known NFT projects such as Spells of Genesis and RarePepe are built on the Counterparty platform.

Overall, the Counterparty protocol utilizes the Bitcoin network and technology to provide financial products and services that Bitcoin itself cannot offer, making it a more comprehensive decentralized financial platform. Additionally, the Counterparty protocol is still alive today and is one of the oldest and most well-known decentralized finance (DeFi) platforms in history.

And on September 15, 2015, Gnosis founder Martin posted his thoughts on how MarketMaker and OrderBook could be combined on his own forum. This is also the earliest post I found about decentralized prediction markets.

Gnosis is a decentralized prediction market built on the Ethereum protocol, providing an open platform for people to predict the outcome of any event, greatly simplifying the process of creating customized prediction market applications. At the same time, Gnosis utilizes the trust machine and smart contract automatic execution features of blockchain, allowing players to enter the prediction market more flexibly and freely, bringing greater imagination to the prediction market. By the way, this Martin is quite impressive, and he is related to GnosisChain (formerly xDaiChain), Balancer, SAFE Wallet, and CowSwap.

On October 27, 2015, Gnosis founder Martin initiated another discussion on his own forum on how to provide a certain amount of funds as initial liquidity for the newly created PredictionTopic to ensure the normal operation of the market.

For example, providing funding through project sponsorship, or collaborating with other investors or foundations to obtain financial support. This post emphasizes the importance of community involvement. It can be said that this is the earliest discussion post I discovered during the archaeological process on how to attract more liquidity and participation.

On September 26, 2016, Nick Johnson, the Chief Development Engineer of Ethereum and ENS, posted a thread on Reddit proposing a decentralized exchange concept called Euler. The main content includes:

Although Coburn has not formally confirmed or denied the SEC's allegations, he has agreed to settle with the regulatory agency, paying $300,000 in disgorgement, $75,000 in penalties, and $13,000 in pre-judgment interest. To establish Coburn's personal liability, the U.S. Securities and Exchange Commission demonstrated:

EtherDelta violated securities laws, and Coburn caused EtherDelta to violate the Securities Exchange Act by knowing or should have known that his actions would result in EtherDelta violating securities laws.

EtherDelta has reported to the CFTC, mainly because its trading is mainly in digital currencies, not financial securities. However, the SEC later issued guidance that many tokens are classified as securities, so theoretically EtherDelta should also report to the SEC. However, at that time, the SEC's regulation of blockchain innovations was not clear, and EtherDelta did not proactively report to the SEC.

There are some messy stories about team conflicts in EtherDelta, such as forking out a forkDelta, and even becoming the first decentralized exchange to run away due to centralized equity disputes.

The approximate timeline is:

At the beginning of 2018, the founding team of Yide sold the platform to Chinese businessman Chen Jun. According to a document exposed with a signing date of December 15, 2017, Yide conducted an equity delivery and prepared to start raising ETH (Ethereum) in the market.

On February 9, 2018, the team issued a statement that they were upgrading their technology. On February 18, the Yide Exchange was reported to have suspended trading. On February 19, the founding technical team overseas sold the Yide platform to obtain funds and forked the Yide project, launching a new "ForkDelta" trading platform.

On February 21, 2018, the German exchange suspended trading again, and the actual controller Chen Jun was exposed to have fled.

AMM Era Officially Begins

Bancor's most important innovation is the introduction of the AMM mechanism into the decentralized exchange field, which solves a series of challenges in decentralized trading and actually lays the foundation for AMM applications within the Ethereum ecosystem. Unlike the traditional method of matching buy and sell orders with an order book, Bancor uses liquidity pools to solve the problem of pricing and matching orders in decentralized exchanges, allowing users to trade without waiting for counterparties.

On September 29, 2017, IDEX, founded by brothers AlexWearn and PhilipWearn, officially launched its beta version. However, the project's source code was first uploaded to Github in January 2017.

2017 was the peak of the ICO bubble, with various ICO projects emerging. However, the quality of most projects was uneven, and chaos was rampant. As the ICO market cooled down, people holding various tokens began to look for ways to sell them. However, at that time, mainstream exchanges were not decentralized, and there were third-party institutions controlling risks, which provided an opportunity for IDEX.

It mimics the Counterparty protocol previously built on Bitcoin and implements decentralized trading functionality on the first generation of Ethereum. Users can trade various Ethereum and ERC20 standard tokens through IDEX, avoiding the need to trust third-party organizations and institutions.

IDEX is focused on:

Functional completeness. Supports real-time cancellation of unexecuted orders (and it's free because it's off-chain), market order trading, and other features with strong ease of use.

Low transaction fees. The transaction fee is 0.3%, which is relatively cheaper than other decentralized exchanges.

High anonymity. IDEX does not require real-name authentication at the beginning of its launch, making it suitable for users who value privacy.

However, at that time, the entire DEX was just getting started and the trading volume was low. In 2017, the total trading volume was only around 50 million US dollars. Although IDEX was considered popular at the time, the trading volume was still very low. This proves that the decentralized exchange products and ecosystem were still immature at the time and needed continuous improvement of products and enhancement of user experience. On November 8, 2018, an article summarized that IDEX was stably ranked first among DEXs at that time.

MakerDAO (launched in December 2017)

MakerDAO's main innovations include:

Transparency and Autonomy: MakerDAO adopts a decentralized autonomous organization (DAO) model, allowing holders of MKR tokens to participate in decision-making and governance of the platform. This model increases the transparency of the system and community participation, improving the fairness of decision-making and the reliability of the system.

KyberNetwork (launched on February 26, 2018)

Instant Exchange: KyberNetwork allows users to directly exchange tokens without the need for a centralized exchange. Users can trade directly through KyberNetwork's smart contracts without the need for buying and selling on centralized exchanges.

Decentralized Liquidity Pool: KyberNetwork has introduced a decentralized liquidity pool that aggregates funds from multiple participants, providing a deeper and more liquid market. These liquidity pools are provided by users holding tokens and managed through smart contracts.

Best Price Execution: KyberNetwork executes trades by automatically selecting the best price and liquidity source through smart contracts. This means that users can obtain the most favorable exchange rate and avoid comparing and selecting between multiple exchanges.

Flexible Integration: KyberNetwork provides open APIs and smart contract interfaces, allowing other decentralized applications (DApps) and services to seamlessly integrate and leverage KyberNetwork's liquidity.

0xProtocol (launched in May 2018, raised $24 million in ICO)

Support trading of any ERC20 tokens, not limited to two tokens. Adopt an economic incentive model based on governance token ZRX. Provide a unique 0x Mesh network connecting various relay nodes.