DEFI - From Inception To 2021 And Beyond (History Of Decentralized Finance Explained)

so what's the story behind decentralized

finance

how has all of this started what

happened in d5

in 2020 and where are we going in the

future you'll find answers to these

questions

in this video before we begin if you

want to learn more about decentralized

finance

and the technology behind it make sure

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this video

i'll be referring to some of our other

videos that covered particular events in

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let's start from the beginning although

there is no one

agreed upon date when decentralized

finance was born

there were a few important events that

made d5 possible

the first of them was the creation of

bitcoin in 2009 by satoshi nakamoto

despite whether bitcoin should be

classified as defy or not

its inception was the key enabler for

the whole cryptocurrency industry

which decentralized finance is part of

bitcoin

also allows for sending payments around

the world in a decentralized fashion

and payments is one of the areas of

finance

looks like defy to me but more

importantly

bitcoin enabled the creation of ethereum

a default blockchain for

all the top d5 protocols although

sending bitcoin around the world

is cool finance doesn't stop there every

robust financial system

needs a set of other important services

such as

lending borrowing trading

funding or derivatives bitcoin with its

simple and limited language called

script

was just not suitable for these kinds of

applications

scripps limitations were one of the most

important factors

that contributed to the creation of

ethereum

by vitalik buterin ethereum launched in

2015

and quickly started attracting more and

more developers

who wanted to build all kinds of

decentralized applications

ranging from games such as cryptokitties

to financial applications ethereum with

its true incomplete

programming language solidity and the

erc20 standard for creating new tokens

quickly became a go-to smart contract

platform

to build on this leads us to one of the

oldest d5 projects on ethereum

maker maker is a protocol that allows

for creating a decentralized stablecoin

dye the project was formed in 2014

by roon christensen was inspired by

another project

beachers a blockchain created by dan

larimer

development of maker was funded by

venture capital

and was eventually launched at the end

of 2017.

the first iteration of the protocol

single collateral

dye supported only it as collateral

this was later expanded to

multi-collateral dye

that was launched at the end of 2019

maker remains one of the most important

projects in d5

and is clearly one of the early pioneers

of the whole decentralized finance space

another project worth mentioning

that was really popular in 2017

was ether delta ether delta was one of

the first decentralized exchanges

built on ethereum that allowed for a

permissionless exchange of erc20 tokens

the exchange was based on an order book

as we know building order book exchanges

on layer 1

is hard and usually results in poor user

experience

despite that ether delta was one of the

most popular exchanges

for trading different erc20 tokens

especially

during the ico era unfortunately

the exchange was hacked at the end of

2017.

the hacker gained access to etherdelta

frontend

and proxied the traffic to a phishing

site scamming the users

for around eight hundred thousand

dollars on top of this

the founder of ether delta was charged

by the sec for running an unregulated

security exchange

in 2018 which was pretty much a nail in

the coffin

also during 2017 one of the first big

use cases for ethereum

icos became prevalent new products

instead of raising money using

traditional methods started offering

their own tokens

in exchange for it although the idea of

decentralized fundraising

was not bad in theory it resulted in

multiple overhyped projects

raising way too much money without

anything to show

besides a few pages of a white paper in

the plethora of icos

there were also a lot of projects that

we would today classify

as defy some of the most notable defy

projects from the ico era were

ave landing and borrowing synthetics

previously known as haven a liquidity

protocol for derivatives

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 banker and other on-chain

liquidity protocol

it's interesting to see that despite the

bad reputation of 2017

ico mania some of the projects that

emerged back then

are now considered the top protocols in

defy

one of the main breakthroughs at that

time was the idea of users

interacting with smart contracts

containing pulled funds

from multiple users rather than

interacting directly with other users

this basically created a new

user-to-contract model

that was more suitable for decentralized

applications

as it didn't require as many

interactions with the underlying

blockchain

as the user-to-user model after the ico

mania was over

and the bear market kicked in defy

experienced a relatively quiet period

at least this is how it looked from the

outside in

reality behind the scenes major defy

protocols were being built

i usually call this period of time

before comp

we're going to learn later why compounds

comp token liquidity mining

was a major breakthrough in d5 before we

get to this

let's first explore a few other

important protocols and events

that happened during that seemingly

quiet period of time

on the 2nd of november 2018 the initial

version of uni swap

was published to the ethereum mainnet

this was

the culmination of over a year's worth

of work

by its creator hayden adams

uniswap is clearly one of the most

important projects

in the d5 space in contrast to ether

delta

uniswop was built on the concept of

liquidity pools

and automated market makers leveraging

again the previously discussed user to

contract model

the first version of uni swap was

entirely funded by a grant

from the ethereum foundation in july

2019

another important event happened

synthetics

launched the first liquidity incentive

program

a mechanism that later became one of the

key catalysts

for the defy summer of 2020 also

multiple other d5 projects launched

their protocols

on the ethereum mainnet between 2018

and 2019 these included compound

ren kyber and 0x

on the 12th of march 2020 the price of

heath sharply dropped by more than 30

percent

in less than 24 hours as a result of

fears

over the global pandemic this was one of

the biggest stress tests

for the still nascent defy industry the

ethereum gas fees

raced dramatically to over 200 gray

which was really high at that time as a

result of

multiple users trying to increase their

collateral

in various loans and trying to trade

between different assets

one of the most affected protocols by

this event

was maker the wave of liquidations

caused by users

eth collateral losing value resulted in

the keeper bots

external players responsible for

liquidations

being able to bid zero die for the

auction heath collateral

this led to a shortfall of around four

million dollars worth of

heath that was later accommodated by

creating

and auctioning additional makers mkr

tokens

in the end even though events like black

thursday can be quite severe

they usually result in the strengthening

of the whole defy ecosystem

making it more and more anti-fragile

this brings us

to the major period of defy growth also

called

the t5 summer before we continue if you

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the main catalyst for defy summer was

the liquidity mining program

of comp tokens launched by compound

in may 2020 diva users started being

rewarded for landing and borrowing

on compound the extra incentives in the

form of comp tokens

resulted in supply and borrow apis for

different tokens

going up dramatically this also enabled

the development of

yield farming as users were incentivized

to keep switching between borrowing and

lending

different tokens to achieve the best

yield possible

this event also initiated a wave of

other protocols

distributing their tokens via liquidity

mining

and creating more and more yield farming

opportunities

it also created compound governance

where users with comp

tokens could vote on different proposed

changes to the protocol

compound's governance model was later

reused by multiple other d5 projects

this brings us to another major defy

in finance yearn developed by andrei

cronier

in early 2020 is a yield optimizer

that focuses on maximizing defy

capabilities

by automatically switching between

different lending protocols

to further decentralize yearn andrei

decided to distribute a governance token

wifey to the yearn community in july

2020.

the token was fully distributed via

liquidity mining no vcs

no funder rewards no dev rewards this

model

attracted a lot of support from the

default community

with money flowing into the incentivized

liquidity pools

topping 600 million dollars in locked

value

the token price itself started its

parabolic run

from around six dollars when it was

first listed on uni swap

to over thirty thousand dollars per

token

less than two months later like with

pretty much

all groundbreaking projects in defy

yern's success

was quickly followed by multiple other

teams

launching similar projects with a few

minor alterations another project that

started gaining more and more traction

thanks to its unique elastic supply

model was ample forth

this model was very quickly borrowed and

reiterated on

by another defy protocol yam

yam after only 10 days of development

was

launched on the 11th of august 2020

yam tokens were distributed in the

spirit of

wifey and the protocol quickly started

attracting a lot of liquidity

the protocol aimed at building interest

in strong defy communities

by rewarding holders of comp land

link maker snx and wifey

for staking their tokens on the yam

platform just

one day after the launch with half

billion dollars of total value locked in

the protocol

a critical bug in the rebase mechanism

was found

the bug affected only a portion of

liquidity providers

in one of the pools ycrv yam

but this was enough for people to lose

interest in yam

despite their later attempts to relaunch

the protocol

then comes sushi swap launched at the

end of august 2020

by an anonymous team the protocol

introduced a new concept

of a vampire attack that aimed at

siphoning liquidity

out of uni swap by incentivizing

liquidity providers

of uni swap with sushi tokens sushi swap

was able to attract as much as 1 billion

dollars worth of liquidity

after some drama with the main sushi

swap developer chef nomi

selling his entire stake of sushi tokens

the protocol

was eventually able to migrate a lot of

uni swaps liquidity

onto their new platform during the defy

summer

there were a lot of other projects of

varying quality

being launched most of them were just

iterations of existing

open source projects trying to benefit

from the over-exuberance

in a completely new industry following

yam and sushi

there was a bunch of other projects

named after different kinds of foods

being launched

we had pasta spaghetti kimchi

hot dog and others collectively named

as food defy or food finals pretty much

all of them failed after a day or two of

interest

one of the last major events of defy

summer was the launch of the uni swap

token

uni all the previous users and liquidity

providers of uni swap

were rewarded with a retrospective

airdrop

worth well over one thousand dollars on

top of that

uni swap started its liquidity mining

program

across four different liquidity pools

and attracted

more than two billion dollars in

liquidity

most of which was taken back from sushi

swap

during defy summer all of the key design

metrics

improved dramatically uniswop's monthly

volume

went from 169 million dollars in april

2020

to over 15 billion dollars in september

2020

a massive increase of almost 100x

total value locked in dethigh went from

800 million dollars in april

to 10 billion dollars in september and

over 10x increase the amount of bitcoin

moved to ethereum

went from 20 000 in april to almost

60 000 in september a 3x increase

defy's parabolic ascent was of course

not sustainable long term

the market sentiment quickly changed at

the beginning of september 2020

major defy tokens started sharply losing

their value

the yields from liquidity mining that

are derived from the value of the

distributed tokens

also became lower and lower the defy

winter

has come the negative sentiment lasted

throughout september and october despite

the defy ecosystem

still being very active with developers

continuing to build new default

protocols

the defy market finally found its bottom

in early november

with some of the top d5 protocols

trading 70 to 90 percent lower

than their all-time highs just a couple

of months

earlier after a quick rebound of more

than 50 percent

the defy market started trending up

again

interestingly during the defy winter the

uni-swap volume

still remained much higher than it was

in early 2020

also the total value locked in defy kept

trending upwards

topping 15 billion dollars at the end of

the year

this was all despite multiple hacks that

haunted the defy industry

throughout 2020 busy eggs harvest

acropolis pickle cover to name just a

few

at the end of 2020 with bitcoin breaking

its previous

2017 all-time high it looks

like difa is preparing for another

parabolic run

looking further into 2021 and beyond the

future of defy is bright

defy developers keep building new

innovative projects

much needed scaling is also coming in

the form of

ethereum 2.0 layer 2 solutions

and even other blockchains this will

allow

for a new set of users to start

participating in d5

it will also help with discovering new

use cases

that were previously just not possible

due to high network fees

bringing new more traditional assets

into defy

by either tokenizing them and creating

their synthetic versions

will also open up completely new

opportunities

competition between defy on layer 2 d5

on ethereum 2.0

defined on bitcoin and defy on other

chains

will also play a big role

interoperability protocols

and cross chain liquidity may become

really important

other areas such as credit delegation

and

under under-collateralized or

non-collateralized loans

are also being explored this will all

become clear

in 2021 and beyond so what is your

favorite part

in the history of decentralized finance

where do you think this

space is going in 2021 comment

down below and as always if you enjoyed

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