DeFi first received widespread attention in 2020 because of a security incident.
On February 15 and 19, the loan agreement bZx was hit by hackers one after another. Hackers used multiple protocol combinations to achieve arbitrage, resulting in the loss of millions of dollars. Despite the damage to the project, it also made the outside world notice the combination of DeFi, which is a kind of “matte doll”.
In the next six months, users’ attention was no longer on security. Compound used liquidity mining to create a wealth effect, and DeFi protocols such as Balancer and Curve followed suit. Afterwards, projects such as YFI, Yam and other fair distribution of tokens appeared, which aroused the enthusiasm of “Farming for all”.
People grow grapes (GRAP), make sushi (SUSHI), and pickle (Kimchi) by collateralizing stablecoins, mainstream assets, or providing liquidity. The protocol model that grew up on Ethereum has been copied on EOS, TRON, and Binance Smart Chain. This wave of mining frenzy is like acceleration, pushing DeFi onto the main stage of the encrypted asset market and becoming the hottest topic in 2020.
In September, DeFi began to cool down. As of October 29, the total market value of Ethereum’s DeFi assets fell by 42.78% from the September 1 high. Even so, DeFi still has a profound impact on the industry, as can be seen from the fact that mainstream centralized exchanges treat it as infrastructure and move into the business sector.
“DeFi is not cool, but it has returned to a period of stable development.” Facing the ebb of DeFi, Pan Chao, the head of the Maker China community, commented. In his opinion, the bursting of the DeFi bubble is a good thing. Outside the development route.
It can be seen that DeFi protocols including Uniswap and Synthetix have begun to explore Layer 2 expansion solutions, and some practitioners have focused on innovation in areas such as NFT and oracles.
After 5 years of hard work, DeFi has gone through an obscure era, passing through bulls and bears, and then relying on liquidity mining to enter the mainstream view in 2020. Although there are many bubbles, the feasibility and development potential of DeFi have been verified. This nascent market has entered the next stage of its journey.
Hacker attack accidentally enlightened DeFi “domestic doll”
Before Compound used liquid mining to ignite the lead of the DeFi outbreak, DeFi attracted more attention from several hacking incidents.
At the beginning of 2020, after nearly 5 years of iterative dormancy, several pearls in the decentralized finance field have become more and more shining. Maker, Compound, Uniswap, Balancer, Aave, dYdX and other protocols have achieved substantial growth in user scale and asset scale in 2019. , The decentralized stable currency exchange Curve, which focuses on low slippage and low handling fees, was launched in January. The “Lego” gameplay of combining and arbitrage among the “protocols” was first targeted by hackers.
In February of this year, the DeFi loan agreement bZx encountered two attacks in a week, and hackers spent more than one million dollars in empty gloves. After careful study, hackers, with a full understanding of DeFi, attacked a single protocol vulnerability and made a combination of punches.
In the first attack, the hackers used multiple DeFi protocols such as dYdX, Compound, bZx Fulcrum, Kyber, Uniswap, etc. to arbitrage 1,271 ETH, valued at over $320,000. “In short, hackers took advantage of bZx’s contract loopholes, borrowed large sums of money, and then manipulated prices on Kyber and Uniswap connected to bZx, and arbitrage succeeded,” said Pan Chao, head of the Maker China community.
Three days after the attack, the hacker reappeared and once again called multiple DeFi protocols including Synthetix, and finally succeeded in making a profit of 2,388 ETH, worth about 644,000 US dollars.
Today, similar security incidents still occur from time to time. On October 26, Harvest suffered a flash loan attack. Earlier, the loan agreement Lendf.me was stolen, and Balancer also suffered losses due to a flash loan attack.
However, starting from the bZx security incident in February, the interoperability of the combination of DeFi protocols was accidentally publicized by hackers, and the “domestic baby” attribute began to be known to the outside world.
Liquid mining brings butterfly effect
On June 15th, when the mainstream people in the crypto world focused their attention on the market performance of mainstream currencies after the production reduction, a historical event that was meaningful to the development of DeFi occurred. The well-known loan agreement Compound announced the opening of liquidity mining, and users can mine COMP tokens by participating in the loan. Transforming “transaction mining” to the on-chain gameplay is like a butterfly flapping its wings, bringing about a DeFi explosion.
After the start of liquidity mining, the COMP token was launched on Uniswap as soon as possible. The next day, the market value of COMP surpassed the market value of Maker’s governance token MKR and took the top spot in the market value of DeFi protocol.
The wealth effect allows Compound to attract a large number of users and an influx of funds in a short time. According to statistics from “Blue Fox Notes”, as of July 5, Compound’s total deposits exceeded US$1.39 billion, approximately 10 times more than 20 days ago, and total loans exceeded US$770 million, approximately 30 times more than 20 days ago; the number of deposits reached 30616, the number of borrowers reached 4248.
At the same time, COMP has also stepped out of the DEX category on Ethereum, landing on dozens of centralized exchanges (CEX) including OKEx, Coinbase, and Binance. The “out of the circle” of phenomenon-level projects has accelerated the popularity of DeFi.
Liquid mining is not a new model. This term was proposed by CoinFund founder Jake Brukhman a few years ago. He discussed the concept of “Generalized Mining”. The ingenuity of liquid mining is that when a certain network has specific needs such as liquidity supply, users provide Liquidity can be rewarded with tokens. Many people also call it “income farming.”
This kind of incentive model quickly became popular once Compound was initiated. The decentralized exchange Balancer quickly followed up and issued BAL tokens in a similar manner. Its liquidity also increased from less than US$20 million on June 5 to US$140 million on July 5, an increase in one month. About 7 times. Later, agreements such as Curve, Bancor, Thorchain, mStable, bzx, and Kava also joined the liquidity mining army.
The story of DeFi is here, and it is an acceleration compared to the previous year. At the beginning of July, DeFi was still a game played by some institutions and early DApp players. Most investors have not yet figured out what DeFi is? How to play liquid mining? Some offline popularization activities and online sharing and discussion about DeFi have spread DeFi from niche to masses.
“Dolls” mining opens the DeFi bull market
“Compound liquidity mining is a fuse, but it is not a tipping point.” Pan Chao viewed it this way because he felt that Compound was still a game of a few people at the time. It was not until YFI was launched that the “snowball” became bigger and more. Many people joined in.
On July 18, the DeFi protocol yearn.finance officially launched the sub-governance token YFI. Users can obtain tokens by providing liquidity to the platform’s aggregate liquidity pool. Different from early fundraising and distributing tokens to investors such as Compound, YFI adopts a token distribution method that has the spirit of blockchain, 0 private placement, 0 pre-mining, and a total of 30,000 tokens are all passed through “mining Mine” output and start DAO governance.
After the launch of YFI, it quickly gained popularity among many Amber V. Its business model is also extremely innovative. Yearn.finance focuses on the concept of aggregators, which can intelligently allocate and transfer the tokens it expects to lend between dYdX, Aave, and Compound, so that users can get the highest revenue. This product later It is likened to “machine gun pool”.
YFI’s entry into the mainstream crypto world is mainly due to its exaggerated increase and currency price. According to non-small numbers, YFI broke through $1,000 from $3 in 5 days after landing on the market; in another month, the currency price was pushed up to $8,900, equivalent to 0.72 BTC; after landing on mainstream CEX, YFI continued to rise , And finally exceeded USD 44,000 on September 13, which is approximately equal to 4.15 BTC.
Surpassing the price of Bitcoin, put it in the past, it is just a slogan of various project coins, blown cowhide, and painted pie. As a result, it was done by YFI on the DeFi track in 2020.
This journey is almost the brightest moment in the DeFi sector. During this period, the “domestic doll” mining model launched by Yam further boosted market enthusiasm.
At 3 AM on August 12, the DeFi project Yam.finance (sweet potato) started liquid mining. Unlike the self-mining model in agreements such as Compound and YFI, Yam has set up 8 liquid mining pools, where users can mortgage YFI, Weth, COMP and other assets to participate in “sweet potato mining”.
At the beginning of the launch, the highest annualized profit of mining YAM tokens reached 22000%. Everyone, including Authur Hayes, the founder of BitMEX, has become “farmers” and is vying for top mining. In just 6 hours, the value of Yam’s locked assets reached US$200 million.
Under the “sweet potato effect”, collateral assets that can be used for mining have all risen, and the “domestic baby” model has begun to show its power. Amber Big V “Super Bitcoin” calls it “a beautiful new bubble world”.
Although in the end Yam only went crazy for 36 hours due to additional bugs, it became the beginning of “Farming for All”. Similar “domestic baby” mining projects have emerged in large numbers, and more and more “old leeks” learn to operate on the chain and become “farmers.” People use USDT, mainstream assets, or liquidity to grow grapes (GRAP), make sushi (SUSHI), pickle (Kimchi)…
The DeFi wave caused by this income farming has also spread to public chains such as EOS, TRON, IOST, and even Binance, the representative of the centralized exchange, has quickly developed the Binance Smart Chain to attract the DeFi protocol.
Justswap, DFS, Defibox, Coral, SUN, BEST KITCHEN and other projects appear on these public chains. Centralized exchanges have also launched DeFi tokens at an average rate of 10 per month, and the entire DeFi ecosystem has unprecedented prosperity. A noteworthy milestone is that on September 1, Uniswap’s total transaction volume exceeded 10 billion U.S. dollars, creating a record belonging to DEX.
According to data from Ouke Cloud Chain, in the three months from June 1 to September 1, the total market value of Ethereum DeFi projects increased from US$3.15 billion to US$17.74 billion, an overall increase of 463.17%. The rise of DeFi has brought a wave of bull market belonging to DeFi assets.
Bubble break DeFi once again enters a period of stable development
In the past three months, no one in the blockchain industry did not talk about DeFi. It has become the dividing line between “new leeks” and “old leeks”. It seems that if you don’t participate in DeFi, you will be abandoned by the times.
However, in the explosion of “income farming”, people found that many projects came out just “mining for mining” and did not produce actual value. Essentially, they were still playing a game of funds. At the same time, there have also been many three-no-fake agreements with no team, no audit, and no open source on DEXs such as Uniswap, which are called “Tugou” projects. Various scams and chaos are attached to DeFi hotspot.
Denny, the representative of the Chinese area of the Defibox Foundation, has participated in multiple mining projects and believes that the DeFi market lacks rationality and most liquid mining is essentially a zero-sum game.
Market trends also confirmed the existence of bubbles. Entering September, the DeFi project tokens all fell. The SushiSwap governance token SUSHI, which once exploded due to liquidity mining, fell from a maximum of 13.4 US dollars to less than 2 US dollars. Now it is only quoted at 0.65 US dollars. The prices of most DeFi assets, including YFI, COMP, and BAL, have been cut in half, and the yield of participating in DeFi projects has plummeted, and this wave of bull market has almost come to an end.
On September 17, Uniswap, a heavenly project, once again aroused market enthusiasm by airdropping tokens. The governance token UNI rose from about US$2 to a maximum of US$8.66. The DeFi market experienced a few more days of jubilation. However, Uniswap ultimately failed to “save the market” alone. Approaching October, DeFi began to cool down.
According to data from Ouke Cloud Chain, on October 29, the total market value of Ethereum’s DeFi assets was 10.15 billion U.S. dollars, which was 42.78% lower than the high of 17.74 billion U.S. dollars on September 1.
“With less speculation and hot money away, asset prices and market popularity will drop.” Pan Chao said with a smile, and gravity began to work. He believes that DeFi assets have risen too exaggeratedly before, and the fall is a return of value. Now DeFi is not cool, but it has returned to a period of stable development. It is a good thing that the bubble burst, and the development of DeFi technology is more optimistic. The industry began to pay attention to the right route.
In the past month or so, some people have turned their attention to the mainstream asset market represented by BTC, while others have continued to delve into different business sectors in the DeFi field, including oracles, NFTs, and so on.
Yearn Finance founder Andre Cronje also continued his DeFi experiment. On October 28th, he launched the decentralized chain service outsourcing network-Keep3r Network v1 beta; on the EOS network, a decentralized like Organix was born. Synthetic asset issuance and transaction agreement.
At the same time, in order to solve problems such as the high gas fee of Ethereum, many DeFi protocols are racing to explore Layer 2 expansion solutions. Uniswap is developing the V3 version. Its founder Hayden Adams said that V3 will “solve all problems”; Synthetix is also moving towards L2 Synthetix. In September, the agreement was upgraded twice to reduce gas costs.
“This small outbreak of DeFi has completed its historical mission,” Pan Chao said. More and more people are paying attention to DeFi and learning how to operate on the chain. Many developers have delved into how to build innovative DeFi applications, and the ecosystem has grown.
Of course, in Pan Chao and Denny’s view, DeFi is still far from being widely used.
In Denny’s vision, the ideal world of DeFi is that users can hold mainstream digital assets to borrow, lend, trade, and mortgage anytime and anywhere. Financial services that are not easy to implement in the real world can be quickly implemented through blockchain to achieve financial inclusion. “When the user scale reaches 2% of the world’s population, or 150 million, DeFi may have a real large-scale explosion. I expect it will take a year or two.”
Bitai wallet developer Wen Hao revealed to Honeycomb Finance that as a wallet service provider, he has been doing iterative upgrades of the wallet to make the wallet safer and easier to use, and to help users more easily access the blockchain world. In his eyes, when Ethereum 2.0 is gradually implemented and the infrastructure is complete, DeFi as a basic financial service will have long-term data growth.
From 2015 to 2020, DeFi explored decentralized lending, transactions, “banking” and other scenarios step by step. During this period, explorers such as Maker, Aave, and Uniswap have survived to this day; projects such as EtherDelta and BitShare are also completing their enlightenment. After the mission, fade out of the stage of history.
Looking at the development of DeFi in the past five years, it has gone through an obscure era, crossing the bulls and bears, and then relying on liquidity mining to enter the mainstream view in 2020. Although there are many bubbles in this, DeFi has verified its feasibility and demonstrated its potential.
Pan Chao hopes that people can gradually forget the word “DeFi”. With the gradual combination of DeFi and CeFi, the underlying protocol becomes more and more mature. Centralized assets and physical assets are seamlessly connected to the DeFi world, and users can get DeFi belts without feeling. It is efficient and convenient.
When everyone no longer mentions the concept of DeFi but uses it, the era of DeFi has really come.
