If there is one word to summarize the innovation in the encryption field in 2020, it is DeFi. DeFi is a combination of the two words decentralized finance. It itself is a general term that covers hundreds of crypto projects launched this year with the background of non-custodial financial projects.
Starting in 2020, DeFi has a lot to say. This industry, which was once full of emerging agreements, had tried its best to get investors to invest a total of 1 billion US dollars, but now it is very valuable. As of December 2020, the DeFi agreement has locked in $15 billion; however, if you consider the market value of DeFi tokens and traditional financial institutions that are considering integrating DeFi services, the value of this industry today is much higher.
As 2020 comes to an end, here is a brief talk about the story of DeFi this year.
January to March: DeFi products sprout
On January 1 this year, decentralized finance has not really taken shape. Of course, according to DeFi Pulse data, about 700 million US dollars are locked in various DeFi smart contracts, but the industry is still in its infancy. However, compared with the previous year, this is a significant increase; on January 1, 2019, the DeFi smart contract locked in $278 million.
At the time, investing in DeFi was like taking a risk. Michael Anderson, co-founder of Framework Ventures, a venture capital firm dedicated to DeFi, predicted that by the end of this year, DeFi’s assets will exceed $3 billion, which surprised us. The prices of all the tokens they invested have experienced explosive growth later this year. Anderson said: “2020 is really the year of DeFi expansion.”
DeFi is not going well at the beginning of 2020. In February of this year, a series of attacks, which stole millions of dollars from bZx’s Fulcrum protocol, was the first major incident in dozens of similar attacks. This involves obtaining funds from a DeFi lending agreement and then using it to manipulate the price of funds held in other DeFi agreements and purchasing these tokens with a small amount of funds.
By March of this year, the situation seemed to be getting better again, when the price of Bitcoin rose to around $10,000. The DeFi lending agreement Aave, a smart contract agreement, held US$35 million (US$1.37 billion as of press time) in funds and integrated Tether.
March-May: Sorrow caused by the epidemic
Then, somehow, the epidemic broke out. Bitcoin fell to a low of about $4,500 in mid-March. This commotion has caused problems for MakerDAO’s decentralized stablecoin DAI, leading to a large loss of ETH supporting DAI, causing the price of the stablecoin to rise above 1.1 US dollars-the value of the stablecoin should have been 1 US dollar. In order to save DAI, MakerDAO proposed to use the centralized stable currency USDC to guarantee DAI.
But as governments solve the problem of economic collapse caused by the epidemic, Bitcoin has recovered, and DeFi is back on track. The remainder of the first half of 2020 was overshadowed by the Bitcoin price halving, and the block rewards for Bitcoin miners were halved. Andre Cronje, the creator of yearn.finance, offered to leave the circle, but he didn’t.
June to October: DeFi begins to grab the limelight
DeFi has become crazy since June. Near the end of the month, Compound issued a “governance token” COMP to all users. COMP is designed for the Compound governance agreement; this is a way of keeping promises and deeds, and has a positive say in the future direction of the agreement. But in practice, it became a speculation on the future value of Compound. People began to use COMP to mine, and this game called “liquid mining” began to emerge.
Other agreements such as Aave and yearn.finance have also launched their own governance tokens. Yearn.finance’s YFI soared to a high of around $40,000, even though its token supply cap was only $30,000. Liquid mining has prompted the industry to take action. The amount locked in the DeFi agreement increases by about $1 billion per week, sometimes much faster.
DeFi has produced a complete subculture. The so-called DeFi Degens will look for new “agriculture” everywhere. New projects have sprung up like mushrooms after a rain, and there are more than a dozen projects providing high returns every day. Some of them have revenues of more than 1000%. Obviously, many of them are scams and many investors suffer losses as a result. Other projects that are eager to enter the market and try to catch the hype train are full of loopholes.
The prosperity of this kind of activity has caused a surge in the trading volume of decentralized exchanges. The trading volume of Uniswap, the largest decentralized exchange, even surpassed Coinbase Pro, one of the largest centralized exchanges.
This subcultural group has also found its own sense of humor. Suddenly, so-called meme coins appeared out of nowhere, all based on specific themed foods. There are Tendies, YAM, Pickle Finance, MEME (with pineapple as the icon), SushiSwap, BurgerSwap, Kimchi, Cream Finance, etc.
SushiSwap is a derivative product of Uniswap, which integrates liquid mining mechanism. When its creator “Chef Nomi” cashed out the $14 million Ethereum that was supposed to be used for development and left the market in September, SushiSwap attracted the attention of the DeFi community. The community was irritated. They let Nomi give away the money due to guilt. Returned it back, and gave the control of SushiSwap to FTX CEO Sam Bankman-Fried. Bankman-Fried later returned control to the community.
This industry continues to grow and develop, but everyone knows that it cannot be sustained. In order to persuade investors to keep their money in the DeFi protocol, developers continue to produce more and more tokens. But to some extent, the market will become so inflated that liquid farmers can no longer make that much money, and any agreement that is driven entirely by speculation will collapse.
But before that, the DeFi industry seems to continue to grow. The only thing that bothers it is the annoying Ethereum fee; the development of DeFi has surpassed Ethereum, which is not fast enough to handle all traffic. Ethereum’s transaction fees have risen to an excessively high level, and in some cases, the cost of a single transaction is as high as $15.
October-December: Return of the Bitcoin King
By October, the DeFi boom seemed to be over. DeFi production began to dry up, and all innovations that were readily available to DeFi developers were selected. The funds locked in the DeFi agreement are still increasing, but at a slower rate. The trading volume of decentralized exchanges such as Uniswap illustrates this point. DEX trading volume was USD 8 billion a week at the end of August, dropped to USD 6 billion in September, and then dropped by more than 40% in October to just under USD 3 billion.
DeFi has lost its brilliance, but replaced by a new financial wave that once again swept the crypto world: Bitcoin. Throughout the summer, Bitcoin has been stagnant; since October, the value of Bitcoin has been approximately $10,500. Then it started to keep rising. By the end of November, Bitcoin had broken through the all-time high set in 2017.
As a result, much attention to DeFi has ceased, but the industry still benefits from all the additional funds flowing into cryptocurrencies. After all, DeFi has become a valuable way to earn additional income through cryptocurrency, otherwise the money will remain idle in the wallet. Therefore, although new products have not been put on the market in large numbers and quickly as in summer, DeFi is still growing. At the beginning of October, approximately $11 billion was locked in the DeFi agreement. How about early December? Nearly 15 billion US dollars.
DeFi in 2021 and beyond
None of us have a crystal ball that can predict the future. But DeFi may focus on certain directions next year. The first one is obvious: As big players, including large financial institutions, continue to invest in cryptocurrencies, many people may seek to integrate cryptocurrencies into their products.
Diem (formerly known as Libra) will launch its stablecoin next year; PayPal will continue to launch crypto products globally; as the application for becoming a crypto bank enters the top of the bureaucracy, large US financial institutions may host their customers’ cryptocurrencies .
As DeFi projects become more stable, crypto exchanges will continue to experiment. Several exchanges such as Binance and Huobi have invested heavily in DeFi. For example, Huobi has its own DeFi research laboratory and may introduce new products to the market next year.