History of DeFi
In this article we go through another great video from the team at Finematics. In this one they talk about how DeFi has evolved from when it (likely) began to where we were at the start of 2021.
They go from how things started with bitcoin but this wasn't really suited towards creating any sort of traditional finance model because it didnt have any other built in factors that you need to run any sort of payment for services/products. You need things like lending, borrowing, trading, funding and derivatives and bitcoin does not have that.
More on the history as described in this video is below:
Bitcoin - whilst not considered part of DeFi, the creation of this by an anonymous group or person (Satoshi Nakamoto), it was an important origin point that would lead to further projects that enabled the DeFi projects we see today.
Ethereum is created by Vitaliy Buderim. What he creaed encouraged developers to come on board to use the Solidity programming language (how you write code for Ethereum) to create all new sorts of products on there and it goes through the one of the first projects on Ethereum, Maker which is still one of the most important projects in DeFi.
The video then goes through ICO's - Initial Coin Offerings - which became prevalent in 2017 as a way of raising funds. This led to, as all new kinds of innovations do, issues around seeing offerings raise a lot of money but with little to show. The notable ICOs were AAVE (lending/borrowing) Synthetix (liquidity protocol for derivatives), Ren (providing access to inter-blockchain liquidity), Kyber (on chain liquidity protocol) and more. Many ICO's did not work out however.
Just like the Dot-Com mania in the early 2000's that saw many companies come and go, what has been left after the wave of ICO's are protocols that are being used to fund the next wave of DeFi innovations.
There was also user-to-contract models that came up with users able to interact with other groups of users rather than single user-to-user protocols.
Initial version of UniSwap. One of the most important projects in DeFi and relates to having market makers in the DeFi space.
Other protocols launched on Ethereum main net (Compound, Ren, Kyber, more).
Synthetix launch - key catalyst for DeFi summer of 2020.
12th March 2020 - price of ETH dropped 30% due to global pandemic fears. Known as Black Thursday.
This caused some issues the market but eventually led to making the whole market stronger as it had to deal with these issues.
At this point of the video the DeFi Summer of 2020 is explained and this was led by the launch of Comp Tokens which saw users rewarded for lending and borrowing on Compound. This enabled Yield-Farming which is where users are incentivised to switch between borrowing and buying different tokens to achieve the best yield possible.
Other protocols came up to do this sort of yield harvesting and also something called Compound Governance where users can vote on changes to the protocol. Other protocols built this in as well.
Yearn Finance was another important protocol which maximised how effective DeFi could be by automatically switching between different DeFi protocols.
This is where we get to more in the rewarding of holders in these communities such as what Yam did for users staking their tokens on the Yam platform. But this failed due to bugs prior to launch and lost interest from users.
Sushi Swap is also mentioned which introduced a vampire attack on UniSwap to migrate liquidity from that platform to theirs. The food named protocols came in droves soon after (Pasta, Spaghetti, Hotdog and more but they mostly failed). UniSwap then was able to take back a lot of liquidity from Sushi Swap later on this year via its own efforts to perform liquidiy mining across different protocols.
In late 2020 the markets moved negative from all the positive sentiment (and money) that brough teams towards creating the projects mentioned above but whilst it was a DeFi winter of sorts with prices turning negative, it didn't dampen the abundance of teams still working on these protocols as well as new ones. In fact, more volume was still being brought into the market during this time.
2021 and beyond
This period of time we are in right now can be categorised as the move towards enabling user rewards and new ways for building the infrastructure of the future of finance. We're pretty lucky to be able to see this happening in real-time and its' a big part of why we have this blog here. The future is going to come for all different sorts of industries so it's important to understand where we have been and where we are likely going.
For further reading on this there is a great article by the folks at CoinDesk on how Defi got to where it is (With COMP Below $100, a Look Back at the 'DeFi Summer' It Sparked). In it, they go through how the changing of the seasons is marked with the falling in price of COMP (Compound's governance token) which kicked off the yield farming movement and was one of the first to topple MakerDAO as an industry leader. It also highlights how liquidity mining came about in 2019 thanks to Synthetix to help give people above normal returns on their tokens. This led to other dapps following suit along with automated market makers (AMM), vegetable coins, vampirism and more.
Check it out as well.