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 you subscribe to my channel hit the bell icon and enable all notifications also a big thank you to all of our patreon members for supporting this channel throughout this video i'll be referring to some of our other videos that covered particular events in depth if you'd like to learn more about these concepts you can either pause this video and check out other videos or watch them later 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 made it this far and you enjoyed this video hit the like button so this kind of content can reach a wider audience 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 this video smash the like button subscribe to my channel and check out cinematics on patreon to join our defy community thanks for watching

Channel: Finematics

Views: 194,059

Rating: 4.9727125 out of 5

Keywords: defi, ethereum, bitcoin, decentralized finance, uniswap, makerdao, bitshares, yearn finance, yam, sushiswap, synthetix, aave, compound finance, defi summer, defi winter

Id: qFBYB4W2tqU

Length: 18min 44sec (1124 seconds)

Published: Mon Jan 04 2021

Reddit Comments

[u/cryptototoro]

Great video!

[u/Bruc38]

Defi have come a long way, $EQ of Equilibrium Defi is an amazing project to watch out for