#2 History of de-fi

Gm anon,

Welcome back to the second edition of defined, the de-fi newsletter which will take you from 1 to 100. This edition aims to break down the past of de-fi, the early pioneers and how the industry has evolved so rapidly in a span of few years. In further editions we'll dive deep on the need for de-fi and how we got here. 

In the previous blog, we understood the core idea and necessity behind decentralized finance. Before we dive into exploring various use cases and  possibilities with de-fi, it is essential to understand how de-fi was born and has evolved into the fledgling industry that it is.

Today, seven years after Ethereum's launch, the de-fi ecosystem hosts over $40 billion and provides financial services that are open, permissionless, transparent and accessible to all. It was only in August 2018 that the term “de-fi” was first used in a private Telegram chat by Ethereum developers which gave an umbrella term for financial applications operating on the blockchain.

2.1 Launch of Bitcoin (2009)

The Bitcoin protocol which was launched in 2009 paved the way for the first form of decentralized finance. It allowed users to send transactions in a p2p network without needing any centralized entity to maintain network sanity.

2.2 Launch of Ethereum (2015)

The Ethereum mainnet blockchain was successfully launched in 2015 after raising 31,500 BTC through a crowdfunding campaign selling 60 million ETH. This historic moment made trustless world computers a reality and set the way for release of decentralized applications.

The launch of Ethereum resulted in a Turing Complete Solidity programming language, ERC20 standard and the ability to write smart contracts that have become the base of decentralized applications today.

2.3 Launch of The DAO (2016)

A few members of the Ethereum community announced the inception of The DAO (also known as Genesis DAO) which was meant to operate like a decentralized venture capital fund for the crypto space. The DAO was able to gather 12.7M Ether (worth around $150M at the time), making it the biggest crowdfund ever.

The smart contract was soon exploited after the launch, leading to the demise of The DAO and the infamous Ethereum hardfork resulting in the 2 competing chains: Ethereum and Ethereum Classic.

2.4 MakerDAO and the birth of $DAI stablecoin (2017)

MakerDAO was initially conceptualized in late 2014 looking to create eDollar, the first iteration of what is now known as stablecoin. They subsequently developed a single collateral Dai (SCD) in 2017 which supported only ETH as collateral. This was later expanded to Multi Collateral DAI that was launched at the end of 2019.

The key innovation that Maker heralded was Collateralized Debt Position (CDP) that allowed users to deposit their crypto asset like ETH or wBTC into a smart contract as collateral for a loan. Once the CDP holds the users deposited assets, the user is then able to generate the equivalent USD value in Dai that they wish to borrow. This is important as MakerDAO and its CDP not only led to the creation of the first decentralized stablecoin, but also it was the first effective on-chain loaning mechanism.

Maker remains one of the most important projects in de-fi and is clearly one of the early pioneers of the whole decentralized finance space.

2.5 Etherdelta: The first DEX (2017)

Etherdelta, became the first decentralized exchange to allow permissionless exchange of ERC20 tokens, directly between users (against trading on a CEX). The exchange became very popular because it didn’t require user verification, used Ethereum signup, and supported trades for new altcoins.

2.6 The ICO Mania (2017)

ICOs (Initial coin offering) was the first big use case on Ethereum which became highly popular in 2017. Projects, rather than leveraging traditional financing, started offering their own tokens against ETH to raise funds. This gave birth to some of the most notable de-fi projects that exist today. Although the idea of ICOs/decentralized funding was noble, it eventually became over-hyped where many projects raised a lot of money against a website/whitepaper and never delivered.

2.7 Launch of other mainstream defi protocols (2018-2020)

The ICO Mania of 2017 gave birth to some of the top protocols in de-fi. One of the major breakthroughs during this time was the idea of smart contracts containing pooled funds, which is the basic block behind major de-fi protocols.

Some of the most notable launches were:

• Aave – Open source and non-custodial liquidity protocol where users can earn interest on DEPOSITS & BORROWING assets (= crypto loans)

• Synthetix (previously known as Havven) – 1st Decentralized synthetic asset platform. On-chain exposure to FIAT currencies, stocks, etc. Backed by $SNX as a collateral.

• REN (previously Republic Protocol) – a protocol for providing access to inter-blockchain liquidity 

• Kyber Network – an on-chain liquidity protocol 

• 0x – an open protocol that enables the peer-to-peer exchange of assets

• Bancor – another on-chain liquidity protocol

• Uniswap - Nov 2018, the initial version of Uniswap was published to the Ethereum mainnet

2.8 de-fi Summer (2020)

The crypto markets faced a massive crash in March, 2020 owing to fears over the global pandemic caused by COVID. It was immediately followed by the first period of major growth in de-fi where the TVL (total value locked) crossed $10B for the first time and protocols saw traction and growth.

To give you an idea, here are TVL, volume metrics before/after de-fi summer:

APRIL 2020: de-fi TVL: $800m; Uniswap volume: $169m

SEPTEMBER 2020: de-fi TVL: $10b; Uniswap volume: $15b

The main catalyst for de-fi summer was the launch of Liquidity Mining of $COMP by Compound Finance where users were rewarded for lending and borrowing on Compound.

The extra incentives ($COMP tokens), resulted in the development of yield farming as users were incentivised for various activities like lending, borrowing on different platforms for the best yield possible. 

This led to a wave of other protocols (Yearn Finance, Yam Finance, Sushiswap, Uniswap, Synthetix etc) distributing their tokens via liquidity mining and creating more yield farming opportunities ushering “de-fi summer”.

Present

The crypto and DeFi’s parabolic ascent observed in 2020-21 was, of course, not sustainable in the long term. Top tokens and protocols have lost 80%-95% of their value from their ATH with some major collapses observed in the past few months. We have seen CeFi institutions like FTX, Blockfi, 3AC, Celsius succumb to the market withdrawals throughout 2022. Despite the crash, the DeFi ecosystem is solvent and performed as was expected. Developers are still very active and they continue to innovate and build better DeFi products to enhance global adoption.