Whether it is for the encryption and blockchain industry, or for decentralized finance (DeFi), 2020 will be an incredible year. After the ups and downs of 2020, DeFi has developed into a driving force in the blockchain industry.
In mid-March, the new crown epidemic broke out, and the value of traditional markets and cryptocurrencies fell sharply, which had a negative impact on the exchange rate of MakerDAO's DAI stable currency pegged to the US dollar. MakerDAO almost collapsed, but the power of the community helped it through.
Another key trend in 2020 is liquid mining. The successful issuance of Compound's COMP token proved to be an excellent user acquisition tool, while also creating a new incentive model.
After Compound, other DeFi projects have launched their tokens and incentive activities, and some developers have also built agreements to maximize their profits. Most of the tokens created in these projects are governance tokens. On the one hand, it allows the community to participate in decision-making within the project. On the other hand, this governance mechanism is the key to true decentralization.
However, liquidity mining has also caused some problems, such as user retention. Uniswap's leadership in the decentralized exchange (DEX) field was shaken by SushiSwap, which shows that user retention is one of the key indicators of success.
The increase in activity on the Ethereum network has brought another problem, which is scalability. The high gas price has hit the DAPP activity, especially the game, which dropped by more than 90% from May to August.
In addition, hackers and vulnerabilities in smart contracts have once again proved that the industry is still in a very experimental stage, which has given birth to DeFi insurance products, and insurance products may become a key component necessary for the healthy expansion of the industry.
In the end, the protocol and developers discovered that working independently may not be the best way to deal with competition. Some important project mergers are developed at the end of the year, and this merger may become the main trend in 2021.
Data from DappRadar shows that the DeFi industry will grow rapidly in 2020. The number of active wallets in the DeFi field increased by 466%, from 58,000 at the end of 2019 to around 200,000 at the end of 2020. At the same time, the transaction volume increased from 21 billion U.S. dollars in 2019 to 270 billion U.S. dollars in 2020, an increase of 1178%, and the top 10 DeFi applications contributed 87% of the transaction volume. At the end of 2020, the total locked value in the Ethereum DeFi ecosystem reached the highest level in history of 13 billion US dollars.
Data from Google search shows that in April and September this year, people's interest in DeFi also reached its peak. Among all DeFi-related activities, two aspects have attracted people's attention, namely liquidity mining and the hype of governance tokens. Synthetix was the first project to introduce liquidity mining, and the issuance of Compound and its governance token COMP caused a chain reaction in the industry.
The following data shows the relationship between currency issuance and the number of active wallets reflecting the popularity of the project:
COMP: Within a week, the number of UAW increased from about 300 to 2700 (+800%);
BAL: Within a week, the number of UAW increased from about 200 to 650 (+225%);
CRV: Within a week, the number of UAW increased from about 1000 to 4100 (+310%);
SUSHI: Within one week, the number of UAWs increased from 10 to 7,100 (+70,900%);
UNI: Within 24 hours, the number of UAWs increased from 30,000 to 71,000 (+137%).
In short, the issuance of liquid mining and governance tokens has created a successful model for various DeFi projects to motivate users in the blockchain industry.
Liquid mining is the darling of the DeFi boom this summer. A large amount of funds are flooding in, and new projects are launching the economic model of liquid mining every week or even every day. This has spawned the popularity of some revenue aggregation projects such as Yearn Finance and Harvest Finance. However, as the DeFi fever subsided after September, the sustainability of these projects still needs to be further verified.
Lending agreements have always been the most popular application in the DeFi field, and Compound’s release of governance token COMP in mid-June this year completely launched this field, and the total value of locked assets in lending agreements such as Maker and Aave has also remained high. In particular, driven by the soaring price of COMP, DeFi projects have followed, triggering a large inflow of funds.
Yam witnessed the craziest week of the DeFi boom and also confirmed the worrying side of the DeFi boom. Due to the unaudited code of the bug, the Yam project immediately discovered a problem after experiencing the skyrocketing at the beginning of its launch. After 24 hours of hard work, Yam became a negative teaching material in the DeFi boom this summer.
Earn Finance (YFI), a revenue aggregation project, is one of the hottest DeFi projects this year, and it is still maintaining a momentum of development after the popularity subsides. The price of YFI tokens once exceeded $40,000, which was four times the price of Bitcoin at that time. And YFI founder Andre Cronje has also become an Internet celebrity in the DeFi field, and constantly uses his influence to launch new DeFi projects.
SushiSwap and its anonymous founder Chef Nomi told the story of how a "centralized" DeFi project was decentralized. After being accused of security problems and suspected scams after its launch, Chef Nomi was discovered by community members to buy coins for cash. Eventually the founder of the SushiSwap project transferred out of control.
The decentralized exchange DEX has not missed this round of DeFi boom. Uniswap, the leading DEX leader, dominates the market share of non-custodial exchanges. Because it provides the widest range of assets and an unlicensed listing process, Uniswap has benefited from the DeFi boom this summer.
Bitcoin is still the world's largest cryptocurrency by market value, representing the liquidity of funds that have not entered the Ethereum DeFi space. The integration of Bitcoin and Ethereum is an important step in integrating Bitcoin holders into Ethereum network activities. The rising rate of return in the DeFi field is the main driving force behind the flow of Bitcoin to Ethereum. wBTC is the leader in the tokenization of Bitcoin on Ethereum. The current custodial Bitcoin tokenization solutions are in the leading position, but non-custodial solutions such as renBTC have been waiting for opportunities to surpass.
Yearn Finance has cooperated or merged with at least five different DeFi projects at the end of 2020, including SushiSwap, Akropolis, Cover, Cream and Pickle. This is a new trend that is happening in the DeFi field. Each project has its own characteristics, but each project faces a difficult period in the competition. Through the merger, these projects can learn from each other and develop together.
In 2020, the brutal development of the DeFi field also shows some challenges that currently exist. The scalability problem of Ethereum needs to be solved urgently. In the summer when liquid mining is most popular, the problems of congestion and high fees on the Ethereum network have been exposed. During the peak period, the average transaction cost is more than $50. This also makes Ethereum 2.0 particularly important, not only to ensure the leadership of Ethereum, but also to ensure the survival of Ethereum.
Ethereum, the cornerstone of DeFi, has a long list of challengers, including EOS, Tron, Polkadot, Cardano, Cosmos, and NEAR. Many of them have made important progress in 2020.
In 2020, the DeFi field has encountered many hacking attacks and security incidents, which shows that DeFi is still a very fragile ecosystem. In particular, many smart contracts are launched without review, which makes them the target of hackers. Lightning loan, a new tool for hackers, has caused tens of millions of dollars in losses to the DeFi field in 2020. The YAM project crashed within 48 hours of launch, which highlights the importance of code quality.
However, hackers and security incidents have brought another demand in the DeFi field, and DeFi insurance may become a key and necessary part of the healthy development of this field. yInsure's NFT insurance tokens are eye-catching, and audit company CertiK has also developed a service that enables participants to be compensated in the event of asset losses. The development of these projects has proved to some extent that insurance will be the next important subcategory of the DeFi ecosystem.
In 2020, as DeFi projects have sprung up, the competition for users is intensifying. SushiSwap’s raid on Uniswap, a leader in the DEX field, demonstrated this. Although Uniswap subsequently launched a counterattack and regained some of its own users and traffic, this incident showed that users in the DeFi field are always profitable. There is no loyalty.
In a sense, the DeFi project is not so "decentralized", and some important people play a very key role in the project.
Andre Cronje, the founder of Yearn, set off a storm in this year's DeFi boom and set the tone for the rapid innovation of other discoveries in the DeFi ecosystem.
Sergey Nazarov, the founder of Chainlink, a decentralized oracle project, brought surprises to the DeFi field in 2020. This year, Chainlink has become one of the most important projects in the DeFi field. Nazarov has contributed.
Uniswap founder Hayden Adams has promoted the rapid development of DEX. In 2020, the trading volume of DEX in certain periods can even compete with traditional centralized exchanges.
The loan project Aave is well-known in this year's DeFi boom. Under the leadership of its co-founder Stani Kulechov, Aave has gained a place in the highly competitive DeFi field through steady and continuous improvement.
The white hat hacker samczsun is committed to identifying and helping vulnerable smart contracts. Without his efforts, we are likely to see more DeFi hackers and security incidents in 2020.
Chef Nomi is a negative teaching material. His Sushiswap appeared as a disruptor and challenger of Uniswap, but when he dumped his tokens, he was also abandoned by the community.
Compound founder Robert Leshner is the butterfly that flapped its wings and sparked the DeFi boom this summer. The Compound loan agreement has become the backbone of DeFi and promoted the prosperity of liquid mining this summer.
Although the DeFi boom has cooled in the second half of the year, after skimming the bubble, more projects and participants can calm down and think about future industry trends.
As Ethereum 2.0 takes the critical first step, this makes people look forward to DeFi even more, and more application scenarios and economic models will appear in the DeFi field.
2020 is the year of DeFi's rectification, and DeFi will still bring more surprises in 2021.