The History of DeFi

Module 1.2: The History of DeFi

Aqua Protocol (Stablecoin on TON)

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Welcome to Module 1.2! Today, we’ll dive into the fascinating world of DeFi, sharing its brief yet vibrant history and the key moments that have made this sector so exciting.

DeFi, or decentralized finance, is a whole ecosystem built on the blockchain. Broadly speaking, the birth of DeFi could be traced back to the launch of Bitcoin in 2009. However, more accurately, the true start of the DeFi era was marked by the emergence of the Ethereum network. In 2013, the Canadian-Russian programmer Vitalik Buterin introduced Ethereum to the world in his Whitepaper. By July 2015, the network was operational, raising 31,500 bitcoins through an ICO at launch, which amounted to about $18.3 million at the time, setting the price for Ether at approximately 31 cents. Thus, Ethereum laid the foundation for a universal blockchain, whose functionality significantly exceeds that of just a digital currency, as is the case with Bitcoin. The programming language Solidity, for example, overcame many of the limitations of Bitcoin’s basic scripting language, opening doors for the creation of smart contracts and various DApps (decentralized applications), significantly expanding the horizons of blockchain use. Moreover, the ERC-20 token standard greatly simplified the issuance of new tokens. Although many other blockchains supporting DeFi applications have emerged over time, Ethereum still plays a key role, holding a significant portion of the total value locked in DeFi as of 2023. This value is a cumulative sum of funds invested in DeFi protocols and serves as an important indicator of the well-being of the DeFi ecosystem.

After its launch, the Ethereum platform introduced revolutionary DeFi protocols. The Maker protocol offered the world one of the first stablecoins, initially known as E-Dollar, which was later renamed Dai. In 2016, DAO — a decentralized autonomous organization acting as a community-managed investment fund, conducted its token sale on Ethereum. During the same period, Ethereum became home to the first decentralized exchange — Oasis Dex, opening new horizons for intermediary-free trading.

The Ethereum world came alive in 2017, thanks to the ICO boom. Start-up projects began offering their tokens in exchange for Ether, presenting an alternative to conventional funding methods. Although the ICO mania led to the failure of many overvalued projects, it also laid the foundation for several key DeFi protocols, such as Aave, a lending and borrowing platform; Synthetix, a liquidity protocol for derivatives; and Kyber Network, a blockchain liquidity protocol. These projects received the necessary funding and became notable players in the DeFi sphere.

After the ICO craze subsided in 2017, it seemed DeFi receded into the background for a while. However, developers continued their work. In the calmer climate of 2018, significant DeFi projects such as Uniswap and Compound emerged, becoming catalysts for the so-called DeFi Summer of 2020. Uniswap introduced the concept of automated market makers, eliminating the need for Order Books and using liquidity pools along with algorithms to set prices, offering an innovative approach to exchange operations. Compound, while not the first to propose liquidity mining, introduced a unique system of rewarding users with COMP tokens in addition to regular returns. This innovation led to an explosive increase in activity in the DeFi sector. Projects like Yearn Finance further cemented the popularity of yield farming. YAM Finance and Ampleforth introduced the world to rebase tokens (elastic/rebase supply tokens), sparking a new wave of interest in DeFi.

This period witnessed unique events, including SushiSwap’s “vampire attack” on Uniswap, when a developer under a pseudonym created a clone of Uniswap named SushiSwap and offered additional incentives in the form of SushiSwap’s governance token to users who transferred their liquidity. This allowed SushiSwap to quickly capture billions of dollars in liquidity from Uniswap and highlighted the competitiveness and dynamism of the DeFi space, where an anonymous individual can challenge industry giants in just a few weeks.

The possibility of rapid development is due to the openness and complete transparency of DApps and smart contracts. Users control their funds without being limited to a single platform. An interesting note: SushiSwap initiated a trend where many protocols chose food-related names, spawning a wave of projects like pasta, kimchi, and hot dog, later dubbed “Food DeFi.” However, not all of these projects stood the test of time.

During the so-called DeFi Summer, the total value locked in DeFi protocols increased 19-fold from April to October. In the same period, Uniswap’s locked value increased more than 70 times, and Yearn Finance’s finances increased more than 100 times. Clearly, such rapid growth was unsustainable. By the end of 2020, the market had cooled significantly. However, after a period of calm, DeFi continued its ascent in In 2022, changes in the macroeconomic landscape and the bankruptcy of cryptocurrency exchanges significantly impacted the DeFi world. The decline in cryptocurrency prices and the fallout from major failures were felt throughout the industry, leading to a significant decrease in the total value locked in DeFi. However, even in the face of these challenges, DeFi application developers did not give up. Innovations in DeFi continue to evolve, aiming for new heights.

A discussion on DeFi would be incomplete without mentioning the hacks. While financial losses are undesirable for anyone, the frequency of such incidents can raise doubts among potential DeFi users. As of September 2022, DeFi hacks have led to losses of almost $2.32 billion. Notable incidents include the loss of $190 million from Nomad Bridge, which spurred the DeFi 2.0 trend. This new direction aims to address issues from the first wave of DeFi, seeking to democratize finance while considering scalability, security, centralization, liquidity, and information accessibility. For instance, a DeFi 2.0 protocol might offer insurance against potential losses for liquidity pool participants.

In the history of DeFi, TON holds a special place, representing a platform initiated by the Durov brothers to integrate financial services into Telegram, making it a key player in the further development of decentralized finance. The project’s transition to community-led development after a dispute with the SEC and the integration of built-in wallets and exchanges into the messenger highlight its role in facilitating access to DeFi services, promising a new era in the mass adoption and integration of DeFi into users’ daily lives.

Despite its relatively short history, DeFi has already experienced many successes and failures. But the continuous drive of innovators to create improved financial services indicates even more exciting developments in the future of DeFi. In the next module, we will explore key DeFi metrics and discuss how they can help in assessing the reliability of DeFi projects.

This course was prepared by Julia Palamarchuk (co-founder of Aqua Protocol — the first CDP stablecoin on the TON blockchain, over-collateralized by liquid staking tokens).

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Aqua Protocol (Stablecoin on TON)

AquaUSD is the first TON-native decentralised over-collaterized interest-bearing stablecoin backed by liquid-staked assets