Ethereum: the embryonic form of DeFi



On October 26, DApptotal data showed that the lock-up amount of MakerDAO reached US$1.8 billion, a record high. Who would have thought that 5 years ago, Maker’s idea of ​​mortgage lending was just a white paper.

It was at that time, like Maker, many ideas about building financial applications on a decentralized network entered a period of exploration. With the mining of the Ethereum creation block in July 2015, developers can deploy smart contracts on this rudimentary decentralized system. Within 2 years, decentralized stablecoins, mortgage lending, and DEX trading platforms From the white paper to the beta application.

These applications were not called DeFi at that time. Although the Bitcoin market reached its historical peak at the end of 2017, decentralized financial solutions are lonely and niche. It was inconspicuous when the slogans of ICO and “Blockchain Revolution” came, and quietly explored in small corners outside the mainstream market, including today’s head DeFi protocol Maker and the predecessor of Aave.

MakerDAO started from being teased

以太坊:孕育DeFi雏形 As a protocol for creating stable currency DAI, MakerDAO is now an indispensable infrastructure in open source financial protocols. On October 26, its total locked-up value (TVL) reached 1.8 billion, breaking the record again and becoming the top three regular customers on the DeFi value list.

From a white paper to a lock-up of US$1.8 billion, MakerDAO took 5 years. 5 years ago, it was still a concept.

In August 2015, MakerDAO released a white paper. DAI has not been given the concept of stable currency. It is defined as “the first transferable and fungible encrypted bond.” The issuer (borrower) can issue DAI by locking in value assets to obtain stable and low-risk interest income, which comes from the issuer’s mortgage assets.

At that time, domestic Bitcoin players who were active in the Babbitt community were not cold about this emerging thing. Under the screenshot of the English version of the white paper, some people questioned its origin, “wearing a Yan vest to fool people”; others think the agreement is too complicated “Don’t play if you don’t like to use your brain.”


DAI early white paper (picture from Babbitt)

New things with complex models are really unpleasant in the crypto world where buying and selling Bitcoin is king. But what other encrypted decentralized networks like Bitcoin can do besides transactions has become a topic of exploration by some geeks and scholars at that time.

Open source financial applications have become a direction, but the efficiency that the Bitcoin network gave up for security has become a pain point for application developers. There is a lack of stable and efficient decentralized networks to carry ideas similar to Maker.

The emergence of Ethereum provides selectivity. One month before the publication of the Maker white paper, in July 2015, the first version of the Ethereum mainnet, Frontier, was released. The mining of the genesis block meant that the network was up and running. This first-generation network only opened the mining interface and the scheme for uploading and executing contracts to users, but this simple network has at least the possibility.

Since this version of the Ethereum network does not have a graphical interface, all operations need to be performed through the command line. Turing’s complete Solidity programming language is for smart contract developers and is not very friendly to ordinary programmers. At that time, Vinay Gupta, the release coordinator of Ethereum, issued a message to remind developers that Frontier is the version of Ethereum “in its most initial form” and developers should proceed with caution.

The simplicity does not seem to hinder testing. Augur, a prediction market based on Ethereum (binary options trading), released a beta version and tutorial. The project was supported by a $5.2 million financing. The financial scenario involved in Augur can be regarded as the early DeFi exploration on Ethereum. Although there was no DeFi concept at that time, it still lived with Ethereum to the present.

In addition to Ethereum, Bitshare is also a network of choice for application developers. It is a concept later proposed by EOS founder BM in the early stage, allowing users to use delegated proof algorithms to build peer-to-peer distributed stock ledger accounts and networks. As early as 2014, the mainnet of BitShares was launched. In the month when the Ethereum mainnet was born, Peak, an overseas venture capital group, announced the use of the BitShares 2.0 network to integrate it into the company’s business.

BitShares was once regarded as a model for the application of blockchain technology in financial scenarios at that time. When the Babbitt community saw DAI’s plan, someone left a message, “It’s better to engage in DAI than to engage in BitShares.” No one thought that DAI and Ethereum, which were not optimistic at the beginning, have become the protagonists in the world of encrypted assets. BitShares, which lacks ecological construction, has moved to the edge.

Crowdfunding track attracts gold TheDAO sounds the alarm


The gradual improvement of infrastructure has brought more room for developers to use their powers, and funds quietly entered the market, paving the way for the exploration of open source financial applications based on distributed networks. The first scenario that formed large-scale applications was crowdfunding.

In October 2015, WeiFund, an open source crowdfunding platform based on Ethereum, was launched. Up to now, this platform is still providing services to users.

If it is placed in the process of DeFi, although the storm caused by WeiFund has no major waves, its emergence proves the value of developers trying to build crowdfunding scenarios with smart contracts.

以太坊:孕育DeFi雏形 weifund early page

On Babbitt at that time, someone left a message about the popularity of crowdfunding applications at the time in a message introduced by WeiFund, “It seems that there are many such platforms, and there are too many crowdfunding.”

The appearance of “TheDAO Incident” also confirmed this popularity from the side. In May 2016, DAO, the largest crowdfunding project on Ethereum, raised nearly $60 million. A large inflow of funds attracted the attention of hackers, and bad luck happened.

On June 17, due to a major flaw in the smart contract, TheDAO was hacked, resulting in more than 3 million ETH assets being separated from the fund pool. According to media information at the time, before the attack, the crowdfunding platform had about $100 million in assets in its fund pool.

In order to retrieve assets, the Ethereum network implemented a soft fork to roll back the transaction. Before and after the implementation, the community has always been divided on the issue of whether to roll back, and the differences have been resolved by the coexistence of the two chains. ETC Ethereum Classic (the original chain network) was born from this.

TheDAO also terminated the service. This incident has so far been an important case in the field of blockchain network security. The vulnerability of smart contracts has been a key issue in the industry. Developers always mention the warnings brought by TheDAO incident when discussing security.

In addition to smart contracts, wallets are also an important part of how DeFi can move out of niche circles. If the smart contract realizes the entrance of the application scenario, then the wallet is the door for users to enter the scenario.

In 2016, the Homestead upgrade of the Ethereum mainnet provided tools for “door-building”. The Homestead upgrade has made three important changes-the removal of the Canary contract removes the centralized part of the network; the introduction of new code in the contract programming language Solidity; and most importantly, the upgrade brings the Mist wallet, which allows users to maintain Yes, trade ETH, write and deploy smart contracts more conveniently.

As more and more financial applications try to use smart contracts, some traditional financial institutions have also begun to pay attention to the open source financial protocol on Ethereum.

In June 2016, UBS (United Bank of Switzerland) tested the smart bond Smart bond on Ethereum, which means that traditional financial institutions began to try to put the financial scene in the open network at a very early stage. .


The developer of smart bond (picture from Babbitt)

After crowdfunding and bonds, in October 2016, trading applications also came. The Ethereum-based decentralized exchange IDEX was launched. In order to avoid the inefficiency of the Ethereum network, it adopted an order book model to support restrictions and management. Orders, off-chain matching, and on-chain clearing methods achieve high throughput and real-time transactions. IDEX has become a platform for multiple transactions on Ethereum at the same time.

Open source finance, which is funded by traditional financial institutions, is budding and exploring in the development of Ethereum.

DEX iteration, today’s mainstream protocol is born


In 2017, the open source financial protocols on Ethereum became more diversified. In addition to crowdfunding and transactions, lending protocols that played the role of commercial banks finally appeared in the form of applications.

In September, IDEX’s EtherDelta (in German) was launched. Compared with the former’s off-chain matching, EtherDelta is closer to the purpose of blockchain decentralization and high invisibility. It has the characteristics of encrypted signature transactions and does not require account login, allowing users to use it safely in any corner of the world.

EtherDelta has also become the first stop for early exploration of decentralized transactions in China. Denny, the representative of the Chinese area of ​​the Defibox Foundation, recalled that Yide was the first DEX he used. “At that time, I was holding the mentality of exploring on-chain transactions. The overall feeling was still affected by the performance of Ethereum. It was too slow.”

In addition to Germany, the MakerDAO protocol, which has been running for two years in the concept, finally came out of the white paper. Someone began to deposit ETH into it and became the issuer of DAI. DAppTotal data shows that on December 18, 2017, MakerDAO’s lock-up amount was US$190,000.

Pan Chao, the head of China who joined the Maker team that year, believes that compared with today’s market, it was MakerDAO that could be called DeFi at that time because it built a mortgage lending financial system in a decentralized protocol. And generated one of the most important infrastructure stable coins in the trading world. Pan Chao joined the team at the time, and what he valued was the stablecoin scenario. “At that time, there was no concept of DeFi.”

But in 2017, for open source finance experimenters like Maker, it was almost impossible to attract attention. At that time, the entire market was crazy for ICOs, and it was the focus of the mainstream market to find small currency investments with ETH.

Pan Chao recalled that in 2017, Amber’s focus was on ICOs. Few people paid attention to decentralized applications. It was so small that only developers were professional players and would use these financial protocols. But despite the few agreements in the market and low attention, mainstream DeFi agreements in the market today, such as the lending agreement Aave, and the derivatives trading platform Synthetix, all took shape at that time.

In November 2017, Aave was not yet called Aave, and its predecessor was ETHLend. The scenario tried by this protocol is mortgage lending. Users can use their digital currency assets as collateral and borrow ETH to participate in token crowdfunding or short-term arbitrage. In the early stage of the protocol development, it issued 1 billion LEND tokens and raised USD 600,000 worth of ETH.

It wasn’t until September 2018 that ETHLend was renamed Aave, and it has become a mainstream application, not to mention it. Currently, DAppTotal data shows that Aave’s lock-up amount is US$1.09 billion, ranking fourth in TVL.

In addition, Synthetix, the leading platform for derivatives in the current DeFi agreement, was also launched in 2017. At that time, the name of the platform was Havven. At first, I wanted to be the main stable currency, called nUSD. However, in the later stages, team development turned to the prospect of trading. At the end of 2018, Synthetix, a synthetic asset agreement platform, was born.


Three of the top 10 DeFi agreements with lock-up amount were born before 2017

The prototypes of the three popular apps, Maker, Aave, and Synthetix, were all born before 2017. Why did they shine this year?

Denny believes that the gradual maturity of Ethereum provides access to infrastructure and capital. The market itself has a certain demand for on-chain transactions and lending, especially in overseas markets. “After the theft of MT.Gox, the global king exchange , Many investors have a sense of crisis about storing assets in centralized exchanges. Everyone has begun to look for alternatives, and on-chain transactions have come into view.”

Looking back, today’s DeFi outbreak is not accidental. The birth of the Ethereum network, developers’ on-chain attempts in financial scenarios, and early funding support have paved the way for DeFi to become a track. However, from 2015 to 2017, it has not yet occupied the home field of the crypto asset world. In the obscure era that defines the profile, they live in a small corner outside the mainstream market and evolve silently.

Entering 2018, the explosion of the public chain became fuel again, and some people took a name for chain finance…