The history of DeFi: What's Next?

Defi events in chronological order

The history of any industry has a certain wavy patterns. The crypto is no exception. First, there was encryption, then the invention of the blockchain, the creation of the first cryptocurrencies, a pause, a plateau, a period of stagnation, a slow growth in the number of nodes, evangelists, then the ICO boom, then a weaker IEO boom, one more pause, and now we are seeing the rapid growth of DeFi.

Last time we looked at the philosophical side of DeFi: why was it created and what benefits it can bring. Now, let's take a look at the history of Defi, how this rapidly growing industry was created and developed.

DeFi emerged when the time was just right, as if it was to fill the gap between (let's be honest) general frustration with ICOs, where the amount of scammers was more than 80% of all projects, IEOs and an unquenchable greed.

End of 2018. How it all began

The DeFi movement began at the end of 2018, when a network of 15 Ethereum-based projects came together in an effort to build an independent and open financial system. This includes projects like MakerDAO, Origin Protocol and Paradigm, followed by others like Compound and Kyber Network.

The network has also set some guidelines for DeFi members. First, the project must either rely on a decentralized blockchain in the financial sector, or create a service for it. It must also align with the core principles of DeFi (transparency, affordability, etc.) and adhere to common standards.

At the beginning, decentralized and trustless lending platforms were being developed through Ethereum smart contracts.

People then developed alternative financial services such as synthetic assets, derivatives, or even decentralized exchanges. Besides these services, it also includes stable coins, which are coins (or tokens) stabilized through various solutions to another asset (such as the US dollar).

2019. First achievements

MakerDAO was the first protocol to create a decentralized stablecoin of a kind, DAI. With its help, people could borrow DAI using ether as collateral. Later, other new protocols for lending and borrowing emerged. Compound and Fulcrum have created liquidity pools allowing users to lend or borrow crypto assets, including DAI, USDC (Coinbase Stablecoin), Ether etc.

In 2019, DeFi began to actively develop Decentralized Exchanges (DEX). The rise of Ether locked in DEX pools in 2019 shown in this graph.

Here's what we can see on DeFi Pulse, a website that collects data on DeFi projects built on the Ethereum blockchain, and tracks the growth in how much capital was invested in DeFi projects in 2019 (TVL) by summing the total balance of Ether (ETH) and ERC-20 tokens held by smart contracts. The growth is obvious.

The rise of DeFi has caused a wave of growth in the number of new tokens, which at times would reach transcendent heights in their development. Uniswap emerged this year as a decentralized exchange for trading cryptocurrencies without intermediaries. Uniswap reported more than $8 million in trading volume in November 2019.

But there have also been some major crashes, such as the rapid rise and fall of the YAM token. YAM was an experimental governance token that raised over $400 million in just a few hours after launch, but then a certain bug was revealed in its code, which caused the tokens to be permanently blocked from the network.

By the way, it is important to understand what governance tokens are. Governance token is a token that allows its owner to take part in the management of a cryptocurrency project.

With governance tokens users can propose, discuss, and make changes to a project without relying on or requiring the project team. In addition, token holders can use them to delegate voting rights to other users, experts, and even applications.

Compound, one of the most famous and successful projects in DeFi, was one of the first ones to offer COMP management tokens to its users, i.e. lenders and borrowers. The platform has grown its liquidity sixfold to become the largest DeFi app, only recently overtaken by Aave and Maker.

Then there was the success of Balancer (BAL), and although the rise in the price of BAL tokens did not start very smoothly, the BAL token still grew from about $8 in mid-July to over $ 34 by the end of August.

What's interesting here is that the Balancer token was not thought of as a governance token, but was introduced later, following this new trend in digital assets. Either way, it certainly paid off.

2020. Crazy Growth

The DeFi sector has continued to gain popularity in 2020. Interestingly, the pace increased significantly. This is partly due to COVID-19. While central banks around the world cut the interest rates to boost a suffering from the pandemic economy, loans on decentralized platforms have grown more than sevenfold since March to $3.7 billion.

Liquidity pool-based platforms like Uniswap have become the main platforms for the distribution of the new class of DeFi tokens, and trading volume on these decentralized exchanges has also skyrocketed.

Uniswap and other DEXes use an alternative method of calculating cryptocurrency transactions. The price of tokens no longer depends on the market quotation. Instead, another mechanism has been invented by which the price rises as the tokens are purchased. When tokens are sold, the price drops. In both cases, the exchange rate is determined by the supply curve and not by the market for orders placed by buyers and sellers.

In the third quarter of 2020 the decentralized finance sector showed rapid growth. The total amount of locked funds in DeFi exceeded $1 billion for the first time in the first quarter, in February. In the second quarter, this amount rose to $1.9 billion. As for the third quarter, the bullish trend was evident as the total value of blocked funds in DeFi exceeded $15 billion in September.

So, what is this locking of funds, and how do people make money off it? Since the implementation of lending projects has not yet had much success or has not yet been fully implemented, many projects offer to interact with their platforms in a different way, increasing the liquidity of their coins and thereby rewarding users for such a contribution. This is what we call profitable farming, liquidity mining or staking. 

Profitable farming, liquidity mining and staking

The backbone of DeFi is profitable farming, liquidity mining, and staking - in other words, a reward system.

Profitable farming is also called liquidity mining or yield farming. However, there is a slight difference between these concepts. Farming is a method of receiving a reward in interest form by locking cryptocurrency. In this case, the term yield has about the same meaning as in the bond market.

At the same time, when providing liquidity, in addition to the reward an investor also receives additional tokens. The users who provide liquidity are commonly referred to as liquidity providers who lock their money in a liquidity pool, which is essentially a smart contract.

For example, in the nearest future the NMX token could be mined in a similar way. For providing liquidity, each user will receive NMX LP liquidity tokens, which in turn can be staked to earn even more NMX tokens for holding. The scheme becomes simple once you figure it out. When holding NMX LP tokens on a long-term basis and therefore providing the liquidity, the yield percentages will increase along with the income itself. The advantage of the system developed by Nominex is that withdrawals from the liquidity pool can be made at any time, and staking rewards are awarded daily. Read more about the DeFi Nominex scheme in our further materials.

From everything said above, we can conclude how complex and new the DeFi topic is. But at the same time, there are still a lot of prospects and ways of development. DeFi is often compared to Lego blocks - each app exists on its own, but they can be combined to create something completely new. This is the beauty of an open source world governed by smart contracts - anyone in the world can contribute to innovation and improve the quality of the entire system. Nobody knows how far we can go.