Inventory | What did DeFi experience in 2020?

2020 has been an incredible year for both the crypto and blockchain industries, as well as decentralized finance (DeFi). After the ups and downs of 2020, DeFi has developed into a driving force in the blockchain industry.

In mid-March, the COVID-19 pandemic took hold, and the value of traditional markets and cryptocurrencies plummeted, negatively impacting MakerDAO’s DAI stablecoin, which was pegged to $1. MakerDAO nearly collapsed, but the power of the community helped it pull through.

Another key trend in 2020 is liquidity mining. The successful launch of Compound’s COMP token has proven to be an excellent user acquisition tool while also creating a new incentive model.

After Compound, other DeFi projects launched their tokens and incentives, and some developers also built protocols to maximize their returns. 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 raised some issues, such as user retention. Uniswap’s leadership in the decentralized exchange (DEX) field has been 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 about another problem: scalability. High gas prices have hit DAPP activity, especially gaming, which has dropped by more than 90% between May and August.

Additionally, hacks and vulnerabilities in smart contracts have reaffirmed that the industry is still very experimental, giving rise to DeFi insurance products, which could become a key component necessary for the healthy expansion of the industry.

Finally, protocols and developers discovered that working independently might not be the best way to deal with competition. Some important projects merged towards the end of the year, and this consolidation has the potential to become a major trend in 2021.

data

Data from DappRadar shows that the DeFi industry has grown rapidly in 2020. The number of active wallets in the DeFi sector increased by 466%, from 58,000 at the end of 2019 to about 200,000 at the end of 2020. At the same time, the transaction volume increased from US$21 billion in 2019 to US$270 billion in 2020, an increase of 1,178%. 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 an all-time high of US$13 billion.

Data from Google searches show that interest in DeFi also peaked in April and September of this year. Among all DeFi-related activities, two aspects have attracted attention, namely liquidity mining and governance token hype. Synthetix was the first project to introduce liquidity mining, while the issuance of Compound and its governance token COMP triggered a chain reaction in the industry.

The following data shows the relationship between coin issuance and the number of active wallets that reflect the popularity of the project:

• COMP: In one week, the UAW count increased from around 300 to 2,700 (+800%);

• BAL: In one week, the UAW count increased from around 200 to 650 (+225%);

• CRV: In one week, the UAW count increased from around 1,000 to 4,100 (+310%);

• SUSHI: In one week, the number of UAWs increased from 10 to 7,100 (+70,900%);

• UNI: UAW count grew from 30,000 to 71,000 (+137%) in 24 hours.

In short, liquidity mining and the issuance of governance tokens have created a successful model for various DeFi projects to incentivize users within the blockchain industry.

project

Liquidity mining is the darling of the DeFi craze this summer. A large amount of funds have poured in, and new projects have launched the economic model of liquidity mining every week or even every day. This has led to the popularity of some income aggregation projects such as Yearn Finance and Harvest Finance. However, as the DeFi craze faded after September, the sustainability of these projects still needs to be further verified.

Lending protocols have always been the most popular application in the DeFi field, and Compound’s issuance of the governance token COMP in mid-June this year completely activated this field. The total value of locked assets in lending protocols such as Maker and Aave has also remained high. Especially driven by the surge in COMP prices, DeFi projects have followed suit, triggering a large influx of funds.

Yam witnessed the craziest week of the DeFi craze, and also confirmed the worrying side of the DeFi craze. Due to the unaudited code with bugs, the Yam project was found to have problems immediately after experiencing a surge in the initial launch. After 24 hours of efforts, it still could not be solved. Yam became a negative example in the DeFi craze this summer.

Yearn Finance (YFI), a yield aggregation project, is one of the hottest DeFi projects this year, and it is still maintaining its development momentum after the heat has subsided. The price of the YFI token once exceeded $40,000, which was four times the price of Bitcoin at the time. And YFI founder Andre Cronje has also become an Internet celebrity in the DeFi field, and continues to use his influence to launch new DeFi projects.

SushiSwap and its anonymous founder Chef Nomi tell the story of how a "centralized" DeFi project became decentralized. After being accused of security issues and suspected scams after its launch, Chef Nomi was discovered by community members to buy coins to cash out, which ultimately led to the founder of the SushiSwap project transferring control.

Decentralized exchanges (DEXs) have not missed this round of DeFi craze. Uniswap, the leading DEX, dominates the market share of non-custodial exchanges. Due to its widest range of assets and permissionless listing process, Uniswap has benefited greatly from this summer's DeFi craze.

Bitcoin remains the world's largest cryptocurrency by market cap and represents liquidity for 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 yields in the DeFi space are the main driving force behind the flow of Bitcoin to Ethereum. wBTC is the leader in tokenized Bitcoin on Ethereum. Currently, custodial Bitcoin tokenization solutions are in the lead, but non-custodial solutions such as renBTC have been waiting for an opportunity to surpass.

Yearn Finance has already cooperated or merged with at least five different DeFi projects by the end of 2020, including SushiSwap, Akropolis, Cover, Cream, and Pickle, which is a new trend happening in the DeFi field. Each project has its own characteristics, but each project is facing a difficult time in the competition. Through mergers, these projects can learn from each other's strengths and weaknesses and develop together.

challenge

The wild growth of the DeFi space in 2020 also illustrates some of the challenges that exist. Ethereum’s scalability issues need to be addressed, and in the summer when liquidity mining was most popular, the Ethereum network’s congestion and high fees were exposed. At its peak, the average transaction cost exceeded $50. This also makes Ethereum 2.0 particularly important, not only to ensure Ethereum’s leadership, but also to ensure Ethereum’s survival.

Ethereum, the cornerstone of DeFi, has a long list of challengers, including EOS, Tron, Polkadot, Cardano, Cosmos, and NEAR, many of which have made significant progress in 2020.

In 2020, the DeFi sector suffered multiple hacker attacks and security incidents, which shows that DeFi is still a very fragile ecosystem. In particular, many smart contracts were launched without review, which made them the target of hackers. Flash loans, a new tool for hackers, have caused tens of millions of dollars in losses to the DeFi sector in 2020. The YAM project crashed 48 hours after its launch, highlighting the importance of code quality.

However, hacking and security incidents have brought about another demand in the DeFi field, and DeFi insurance may become a key and necessary component for the healthy development of this field. yInsure's NFT insurance token is eye-catching, and auditing firm CertiK has also developed a service that allows participants to receive compensation in the event of asset loss. 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 has also become increasingly fierce. This was reflected in SushiSwap’s raid on Uniswap, the leader in the DEX field. 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 profit-seeking and have no loyalty at all.

Influencers

In a sense, the DeFi project is not so "decentralized", and some important figures play a very critical role in the project.

Yearn’s founder, Andre Cronje, took the DeFi craze by storm this year and set the tone for rapid innovation for other discoveries in the DeFi ecosystem.

Sergey Nazarov, the founder of the decentralized oracle project Chainlink, brought surprises to the DeFi field in 2020. This year, Chainlink has become one of the most important projects in the DeFi field, and Nazarov has made an indelible contribution.

Hayden Adams, the founder of Uniswap, has promoted the long-term development of DEX. In 2020, the trading volume of DEX in certain periods of time can even compete with traditional centralized exchanges.

Lending project Aave has become a household name in this year's DeFi craze. Under the leadership of its co-founder Stani Kulechov, Aave has gained a place in the highly competitive DeFi field through stable and continuous improvements.

Without the efforts of white hat hacker samczsun, who is dedicated to identifying and helping vulnerable smart contracts, we would most likely see more DeFi hacks and security incidents in 2020.

Chef Nomi is a negative example. The Sushiswap he launched appeared as a disruptor and challenger of Uniswap, but when he sold his tokens, he was also abandoned by the community.

Compound founder Robert Leshner is the butterfly that flapped its wings and triggered the DeFi boom this summer. The Compound lending protocol has become the backbone of DeFi and has driven the boom in liquidity mining this summer.

Outlook

Although the DeFi craze cooled down in the second half of the year, after the bubble was removed, more projects and participants were able to calm down and think about the future trends of the industry.

As Ethereum 2.0 takes its first crucial step, people are looking forward to DeFi even more, and more application scenarios and economic models will emerge in the DeFi field.

2020 is the year when DeFi was vindicated, and in 2021 DeFi will still bring more surprises.

Image source: pixabay

AuthorLiang Che

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