Eight perspectives for a comprehensive overview of 2020 DeFi development: AMM, liquid mining and stablecoins, etc.


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Learn about the eight key trends of DeFi in 2020, which ones will continue in 2021?

Original title: “Eight key trends of DeFi in 2020, which ones will continue? 》
Written by: Chris Power
Translation: Jing Kai

2020 is a year of the times. For DeFi, in the past year, it has also turned from the beginning to the explosion. We have witnessed the power of DeFi.

At the beginning of 2020, DeFi entrepreneurs, developers, and investors have just begun to understand and play with DeFi, a Lego toy, but by the end of the year, DeFi has brought the greatest growth momentum to the crypto community. DeFi hotspots, DeFi memes, are everywhere. In the DeFi field, in the past year, there have been innovations, hackers and lightning loan attacks, there have been forks, moments of market collapse, the carnival of DeFi platform token airdrops, and the coming bull market.

At the beginning of 2021, share an article from Chris Power, let us have a deep understanding of the eight key trends of DeFi in 2020, and see which trends will continue in 2021.

Bitcoin began to support the development of DeFi

In 2020, Bitcoin has repeatedly broken new highs. This year, it has been brilliant and will not disappoint a coin holder. Although a large amount of BTC is still outside the DeFi circle, a small part (0.6%) of the total BTC supply is now through custodians (WBTC, HBTC), semi-centralized bridging (renBTC) or decentralized bridging protocols (tBTC) ) And other methods, using tokenization to access Ethereum. In addition, there are some products that use synthetic tokens to anchor the price of BTC.

Bitcoin is an important source of collateral for lending platforms, and 7% of DAI is issued backed by Bitcoin. Investors tokenize their BTC to obtain the high yield of DeFi. Among the top 10 holders of WBTC & renBTC, 8 are AMM liquidity pools or lending platforms; the ETH/WBTC trading pair has always been the favorite of AMM liquidity market makers, as well as liquidity mining such as Uniswap and Sushiswap An important component of the.

As the price of Bitcoin has soared in the past two months, the growth of tokenized BTC has slowed. BTC will continue to play a role second only to ETH in DeFi, but Bitcoin may be a strong proof of the liquidity black hole theory: DeFi will continue to attract assets to the Ethereum ecosystem .

Hacking is prevalent

In 2020, we have also witnessed many cases of hacker attacks, protocol vulnerabilities and token economic model attacks. After the DeFi agreement went live, the value of the assets guaranteed in the agreement became a honeypot, attracting countless greedy eyes.

On February 15th, the bZx team issued an announcement on the official telegram group, stating that hackers had carried out a vulnerability attack on the bZx protocol. At this time, the ETH Dever activity was ongoing. This is the first major attack case in 2020. The terrifying capabilities of flash loans have undoubtedly revealed the vulnerability of some DeFi agreements.

Eight perspectives for a comprehensive overview of 2020 DeFi development: AMM, liquid mining, stablecoins, etc.

Looking back on 2020, DeFi products were repeatedly attacked and platform protocols were accidentally lost. DeFi has become a hacker’s ATM. The loopholes in the Cover protocol may be the last major incident in 2020. Although many contracts have undergone security audits, they are not foolproof. In fact, many recent economic attacks have cleverly exploited the loopholes in the token economic model to attack smart contracts that have been audited.

Will it be better in 2021? It is difficult to say that this situation will not disappear in 2021. We need broader risk assessment tools, more comprehensive insurance, and more cautious actions.

AMM: DeFi innovation from zero to one

At the beginning of 2020, the DEX of the Ethereum order book model still dominates, and there is not even a conventional term to describe the on-chain liquidity pool that uses the constant pricing function to conduct market making behavior at any price. Now we use AMM – automatic market maker Call it by this name.

Even among all DeFi products, Uniswap can be said to have contributed a lot, because it made us see the simplicity and ease of use of AMM for the first time, but more importantly, it is DeFi traders.

Uniswap’s simple and straightforward exchange page has appeared in all DeFi products and has become a standard module. It can even be seen everywhere in many CEX. The success of Balancer and Curve indicates the strong potential of the AMM market, where there are numerous design solutions and strategies for development.

More importantly, AMM has greatly reduced the cost of liquidity providers. In this field, the cost of assets reserved for large centralized market makers accounted for a high proportion. This may prove to be a killer feature provided by DeFi. . The next goal may be to improve asset efficiency and the scalability brought by the Layer 2 solution.

Black 312, MakerDAO cusp

March 2020 may become one of the craziest months in financial history.

The global collapse of confidence led to the panic selling of major assets. Bitcoin and Ethereum fell by nearly 40% in one day on March 12. They are also called “Black Thursday” in the DeFi field, and we often call them in China. It is 312.

Eight perspectives for a comprehensive overview of 2020 DeFi development: AMM, liquid mining, stablecoins, etc.

The rapid decline in the price of ETH caused catastrophic failure of the MakerDAO system. In summary, the MakerDAO system faces three problems:

  • The collateral is less than 5.4 million yuan
  • The liquidity crunch made Dai lose its anchor, causing Dai prices to soar
  • Holders of multiple vaults suffered heavy losses

In the next few days, Maker conducted a successful MKR token auction for Dai to fill the gap. But for several months, Dai’s transaction price still exceeded $1, even after Maker increased USDC as collateral through governance actions. Now USDC provides support for nearly 40% of Dai.

The most influential result is that Dai abdicated as the king of DeFi stablecoins. Due to the addition of centralized assets, coupled with the practical difficulties encountered in dealing with erratic anchoring, Dai’s competitiveness has declined. USDC took advantage of opportunities to develop during this period and is now one of the most liquid stablecoins in DeFi.

However, Dai’s circulating supply in 2020 will still exceed 10 times, so it is difficult to disappear. If interest rates rise enough to open DSR, it may rebound.

Liquidity mining prevails

In 2020, the explosion of DeFi liquid mining has added additional meaning to “farmers”, and Yield Farmer has become one of the hot words in 2020.

Eight perspectives for a comprehensive overview of 2020 DeFi development: AMM, liquid mining, stablecoins, etc.

Although Synthetix pioneered liquidity mining in the summer of 2019, when the big names in the DeFi field started mining COMP in June this year, everything changed. Mining revenue is intuitively visible, and it is also an innovative way to attract users and liquidity. Compound is a notable example. Since Compound started distributing COMP to borrowers and lenders, the amount of locked positions on the platform has increased by 20 times.

YFI’s fair launch is based on this concept, but YFI’s token incentives are short-lived, and there is almost no asset acquisition. On the contrary, YFI showed how to use liquidity to mine, distribute tokens to participants, and incentivize them to align with the interests of the project-this is a new tool for the formation of the capital market.

In addition, the rise of retrospective rewards for early users (such as Curve, Uniswap & 1inch) marks a further innovation in the token incentive mechanism.

We may look back and see that after Uber/Airbnb/ Didi successfully realized the development of the user network through subsidies, liquid mining will also enter the toolbox of growth hackers.

Forks become popular

For many years, the threat of bifurcation has been a debate in the crypto community’s conversations and has been used as a defense strategy for factional divergence (BCH&ETC), but in 2020, bifurcation has become a widely used strategy in DeFi.

Eight perspectives for a comprehensive overview of 2020 DeFi development: AMM, liquid mining, stablecoins, etc.

In early August, the crazy launch of YAM kicked off the fork and the food currency movement. YAM forked Synthetix’s mortgage contract, Ampleforth’s repurchase design, Compound’s governance contract, and YFI’s fair launch practices. Together, the release of YAM has become “the craziest day in the history of DeFi”, which has also become a reference manual for how to use the existing Ethereum infrastructure and token community and how to successfully guide new products online.

Swerve, Harvest, Pickle and a series of imitators followed one after another, but Sushiswap is a success story that went wrong in the bifurcation movement. Sushiswap adopted a “vampire attack” approach to Uniswap, issuing SUSHI tokens to those participating in Uniswap LP to attract Uniswap users. Later, after the SUSHI token went online, the liquidity was migrated to Sushiswap.

Sushiswap presents a thrilling story in 2020. There are heroes and villains. Based on its last month’s growth and the launch of new features, this seems to be a comeback story.

Sushiswap certainly won’t be the last fork. But not every fork will succeed. The existing smart contracts and front-end have a certain degree of lock-in. The existence of Lindy effect, user familiarity, trust in security audited projects, and successful DeFi projects will be easier to integrate into existing infrastructure. These factors , It’s not that simple to make forks attract users.

Stablecoin Hurricane

In 2020, the stablecoin market has grown amazingly. The market for stablecoins, including the DeFi market, has increased fivefold in 2020, from USD 5 billion at the beginning of the year to more than USD 25 billion today. Tether is still a mystery, but its success comes from the use of CEX-its circulation limit is 10 times that of Dai, but Tether’s liquidity in DeFi is about the same as Dai.

Eight perspectives for a comprehensive overview of 2020 DeFi development: AMM, liquid mining, stablecoins, etc.

The growth of stablecoins may not be directly related to DeFi, because Circle, Paxos, and Maker are trying to incorporate millions of customers into the new payment infrastructure. These users may not use the DeFi protocol themselves, but the products and services they use will be based on DeFi.

The growth of stablecoins has not been ignored by regulators. Although there is no public regulatory action yet, the finance ministers of G7 are making a statement, and it sounds like they will take action. Coupled with the DCEP, the digital currency of the Central Bank of China, it seems that the crypto community will be severely affected by global politics in 2021.

The rise of decentralized governance tokens

Eight perspectives for a comprehensive overview of 2020 DeFi development: AMM, liquid mining, stablecoins, etc.

In 2017, the 0x protocol carried out a 1CO and claimed that the value of ZRX will come from the “governance of the 0x protocol”. For this reason, 0x was ridiculed at the time. Today, three years later, almost every project is launching “governance tokens.”

If you are cynical and think that the craze for token governance is just the latest trick in the crypto community to cut leeks and steal money, you may miss a lot, and you will miss the real on-chain governance decisions, and these decisions will affect many DeFi Key control parameters for large projects. What will happen to open and transparent voting? We will slowly know in the future.

DeFi’s governance system is still in the iterative stage. The new design should try to increase the participation rate and reduce the liquidity of voting. Most importantly, the project needs to develop a unique governance culture of norms and processes, and be able to scale up.

Unfinished words

This article will inevitably miss ten thousand. Ethereum 2.0, Ethereum Gas price war, synthetic assets, the development of asset management on the chain, and the development of DeFi in the second-tier network are also some very interesting topics. Let’s end this article with the two pictures from Vitalik’s summary article at the end of 2020: You ask me where I am going, and I point to the direction of the sea. Wish all readers, everything will be better in 2021.


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