What is History of DeFi
DeFi, short for Decentralized Finance, refers to decentralized financial systems. This concept emerged as a counter to centralized finance. Typically, centralized finance refers to traditional financial services where users rely on centralized financial intermediaries to access services. In contrast, DeFi refers to a situation where users no longer rely on centralized intermediaries to access financial services.
DeFi can be traced back to the invention of Bitcoin in 2008 when it was initially defined as a decentralized, peer-to-peer cash system. This means that when using Bitcoin, users no longer require any centralized intermediaries but instead interact directly with other users.
However, it was after the emergence of Ethereum that the concept of DeFi really gained prominence. This is because Bitcoin only supports the most basic transfer functions. The complex financial functions commonly found in the financial system, such as borrowing, insurance, and trading, cannot be achieved solely through the Bitcoin network. The birth of Ethereum and the introduction of smart contracts made it possible to implement these complex financial functions.
A Brief Timeline of DeFi Development
- In 2013, programmer Vitalik Buterin conceived the idea of Ethereum based on Bitcoin.
- In 2014, Ethereum began formal development and crowdfunding efforts with the help of several other co-founders.
- On July 30, 2015, Ethereum was officially launched as the first decentralized public chain to support smart contracts.
- In 2015, Danish entrepreneur Rune Christensen proposed the concept of MakerDAO and DAI on Reddit, calling it eDollar. The concept of decentralized stablecoins first appeared on Ethereum.
- At the end of 2017, MakerDAO's contract was activated on Ethereum for the first time, with $ETH as the initial and only collateral.
- In 2016, the first decentralized exchange on Ethereum, OasisDEX, officially launched. OasisDEX was an order book-based DEX, primarily trading MKR and ETH at the time. Today, Oasis's main product is no longer a DEX but a DAI lending market.
- In 2017, Bancor went live. Bancor was one of the first decentralized exchanges built on the Automated Market Maker (AMM) model. Bancor's concept was established in 2016, but the whitepaper was not released until February 2017, with the project officially launching in the following months. Bancor's launch was also accompanied by a crowdfunding round, raising $153 million, making it the largest at the time.
- In November 2018, Uniswap was officially launched on Ethereum. Uniswap's founder is Hayden Adams. Interestingly, before developing Uniswap, Haydenz Adams was a mechanical engineer at Siemens, but he was fired in June 2017. Subsequently, under the recommendation of his friend Karl Floersch, who worked at the Ethereum Foundation, he began studying smart contracts and started preparing for Uniswap.
- In 2019, the renowned Ethereum lending protocol Compound Finance v2 was officially launched. Compound was proposed and founded by Robert Leshner and Geoffrey Hayes in 2018. Before developing Compound, both worked at a US-based food delivery company, Postmate.
- In June 2020, Compound officially launched the COMP Token and transferred governance rights of the Compound protocol to the DAO organization, using COMP as the core governance token. The main purpose of the COMP Token's launch was to incentivize both lenders and borrowers to use the Compound protocol. This move was widely welcomed at the time, with many users adopting the protocol to obtain COMP Tokens.
- In July 2020, Yearn Finance was officially released. Yearn Finance's founder is Andre Cronje. Yearn attracted significant attention not only for catching the DeFi Summer and being the first DeFi yield aggregator, but more importantly, for being a fully community-driven project with a fair launch. Andre Cronje did not raise any funds for the project, and he personally did not reserve any YFI tokens.
- In September 2020, SushiSwap was officially launched by anonymous developer ChefNomi, who initiated a "vampire attack" on Uniswap. During that period, many DeFi projects were launched daily, and SushiSwap gained significant attention due to the "vampire attack". The so-called "vampire attack" involved SushiSwap rewarding users who provided liquidity with SUSHI Tokens, while Uniswap had not yet issued its own token, meaning liquidity providers received no additional rewards. With extra SUSHI Token rewards, SushiSwap quickly gained massive liquidity and surpassed all similar DEXs for some time. To counter SushiSwap's attack, Uniswap had to issue its own UNI Token in mid-September that year and started providing liquidity incentives.
- In 2021, the market experienced a massive bull run. The development of protocols on Ethereum and the increasing number of users pushed Ethereum's usage costs to rise, leading to higher Gas Fee, which often exceeded 100 GWEI during the bull market. Expensive Ethereum fees prompted the emergence of new competitors, as users needed an affordable public chain. BSC, Binance Smart Chain, was created in response. With the support of Binance Exchange, BSC quickly developed, and many projects on Ethereum were replicated on BSC, taking advantage of its much cheaper transaction cost. As the platform's Gas token, BNB also soared from a few dozen dollars to over $600 at its peak.
- In 2022, the market was affected by LUNA/UST and FTX, remaining in a downward trend. Despite this, Layer 2 developed rapidly. Layer 2 had emerged much earlier, in response to Ethereum's high Gas fee and slower transaction processing speeds. However, a large number of projects on Layer 2 began to appear in 2022.
- On September 5, 2022, Ethereum's consensus layer officially transitioned from Proof of Work to Proof of Stake. This process is also called "the Merge". This laid a solid foundation for future upgrades and scaling of Ethereum. More importantly, the change in the consensus mechanism significantly reduced Ethereum's new issuance. In the context of high Gas Fees, Ethereum could even become a deflationary cryptocurrency.
- In 2023, we witnessed the explosion of Layer 2. Optimism issued its OP Token in 2022, while another strong competitor, Arbitrum, only officially issued its ARB Token in March 2023. Arbitrum is currently the largest Layer 2 ecosystem, hosting star projects such as GMX and MAGIC. If you are interested in the differences between Arbitrum and Optimism, please check Optimism vs. Arbitrum - A Complete Comparison
The development of DeFi has experienced many significant events, and the simple timeline above can not cover the complete development of the DeFi field. For example, in addition to Ethereum and BSC mentioned above, many Alt L1s, public chains that emerged in a similar context to BSC, also experienced rapid development during the bull market.
Solana, with its different architecture from Ethereum, can achieve faster and cheaper transaction processing speeds. With the support of FTX Exchange and the launch of some star projects, Solana gained a large number of users during the bull market, and its native token SOL rose rapidly from a few dollars to over $200.
Avalanche was another famous Layer 1 development at the time, also providing faster transaction processing speeds and a more user-friendly experience. In addition to these, other notable chains include Polygon, Tron, Polkadot, and Polkadot's Parachains.
The DeFi landscape has undergone numerous milestones and transformations, with many projects and ecosystems emerging and evolving. The continued development of Layer 2, along with the introduction of new public chains and consensus mechanisms, demonstrates the dynamic and innovative nature of the decentralized finance space. While the timeline above highlights some key moments in DeFi history, the full scope of DeFi's growth and potential is vast and ever-expanding.
What else do you want to learn?