Mining "double-edged sword" opens up the post-DeFi era

DeFi first attracted widespread attention in 2020 because of a security incident. On February 15 and 19, the loan protocol bZx was attacked by hackers in succession. The hackers used a combination of multiple protocols to achieve arbitrage, resulting in the loss of millions of dollars. Although the project was damaged, it also made the outside world pay attention to the "nesting doll"-style combination of DeFi.

In the following six months, users' attention was no longer on security. Compound created a wealth effect with liquidity mining, and DeFi protocols such as Balancer and Curve followed suit. Later, the emergence of projects that fairly distribute tokens such as YFI and Yam aroused the enthusiasm for "national farming". People grow grapes (GRAP), make sushi (SUSHI), and pickle kimchi (Kimchi) by pledging stablecoins, mainstream assets, or providing liquidity. The protocol model that grew up on Ethereum has been copied on EOS, TRON, and Binance Smart Chain. This wave of mining craze is like an acceleration, pushing DeFi to the main stage of the crypto asset market and becoming the hottest topic throughout 2020. In September, DeFi began to cool down. As of October 29, the total market value of Ethereum DeFi assets fell 42.78% from the high point on September 1.

Even so, DeFi still leaves a profound impact on the industry, as can be seen from the fact that mainstream centralized exchanges have moved it into their business sectors as infrastructure. "DeFi is not dead, it has just returned to a stable development period." Faced with the decline of DeFi, Pan Chao, head of the Maker China community, commented that in his opinion, the bursting of the DeFi bubble is a good thing, and the industry has begun to pay attention to development routes other than incentives. It can be seen that DeFi protocols including Uniswap and Synthetix have begun to explore Layer2 expansion solutions, and some practitioners have focused on innovations in areas such as NFT and oracles. After five years of hard work, DeFi has gone through an unknown era, crossed bull and bear markets, and then entered the mainstream vision in 2020 relying on liquidity mining. Although there are many bubbles in it, the feasibility and development potential of DeFi have been verified. This new market has entered the next stage of its journey.

Hacker attack accidentally enlightened DeFi "nesting doll"

Before Compound used liquidity mining to ignite the fuse of DeFi's explosion, DeFi attracted more attention with several hacker attacks. At the beginning of 2020, after nearly five years of iteration and dormancy, several pearls in the field of decentralized finance became more and more shining. Maker, Compound, Uniswap, Balancer, Aave, dYdX and other protocols achieved a substantial growth in user scale and asset scale in 2019. Curve, a decentralized stablecoin exchange with low slippage and low fees as its main feature, was launched in January.

The "Lego" gameplay of combining and arbitrage between various "protocols" was first targeted by hackers. In February of this year, the DeFi loan protocol bZx was attacked twice within a week, and hackers took away more than one million US dollars. A closer look found that the hackers had a full understanding of DeFi, attacked a single protocol vulnerability, and then launched a set of combined punches. In the first attack, hackers used multiple DeFi protocols such as dYdX, Compound, bZx Fulcrum, Kyber, and Uniswap to arbitrage 1,271 ETH, worth more than 320,000 US dollars.

"Simply put, the hacker took advantage of the bZx contract loophole, borrowed a large sum of money, and then manipulated the price on Kyber and Uniswap connected to bZx, and successfully arbitraged." Pan Chao, head of the Maker China community, said. Three days after the attack, the hacker appeared again and once again called multiple DeFi protocols including Synthetix, and finally successfully made a profit of 2,388 ETH, worth about 644,000 US dollars. To this day, similar security incidents still occur from time to time. On October 26, Harvest suffered a flash loan attack. Earlier, the lending agreement Lendf.me was stolen, and Balancer also suffered losses from flash loan attacks. However, starting with the bZx security incident in February, the combined interoperability between DeFi protocols was accidentally publicized by hackers, and the "nesting doll" attribute began to be known to the outside world.

Liquidity mining brings a butterfly effect

On June 15, when the mainstream people in the crypto world focused their attention on the market performance of mainstream coins after the reduction in production, a historical event that was quite meaningful to the development of DeFi occurred. The well-known lending protocol Compound announced the launch of liquidity mining, and users can mine COMP tokens by participating in lending. Transforming "transaction mining" to the gameplay on the chain is like a butterfly flapping its wings, bringing about a big explosion of DeFi. After the start of liquidity mining, COMP tokens were listed on Uniswap as soon as possible. The next day, COMP's circulating market value surpassed the market value of Maker's governance token MKR, and topped the DeFi protocol market value list. The wealth effect allowed Compound to attract a large number of users and funds in a short period of time.

According to statistics from "Blue Fox Notes", as of July 5, Compound's total deposits exceeded US$1.39 billion, about 10 times more than 20 days ago, and the total loan amount exceeded US$770 million, about 30 times more than 20 days ago; the number of depositors reached 30,616, and the number of borrowers reached 4,248.

After the launch of liquidity mining, Compound's locked funds soared. At the same time, COMP also stepped out of the DEX category on Ethereum and landed on dozens of centralized exchanges (CEX) including OKEx, Coinbase, and Binance. The "out-of-circle" of phenomenal projects has accelerated the popularity of the DeFi sector. Liquidity mining is not a new model.

This term was proposed by Jake Brukhman, the founder of CoinFund, a few years ago. He discussed the concept of "Generalized Mining". The cleverness of liquidity mining is that when a network has specific needs such as liquidity supply, users can get token rewards by providing liquidity. Many people also call it "yield farming". This incentive model quickly became popular once Compound launched it. The decentralized exchange Balancer quickly followed suit and issued BAL tokens in a similar way. Its liquidity also increased from less than US$20 million on June 5 to US$140 million on July 5, an increase of about 7 times in one month.

Later, protocols such as Curve, Bancor, Thorchain, mStable, bzx, and Kava also joined the liquidity mining army. The story of DeFi has come to this point, which is an acceleration compared to the previous year. At the beginning of July, DeFi was still a game participated by some institutions and early DApp players. Most investors have not figured out what DeFi is? How to play liquidity mining? Some offline popularization activities and online sharing and discussions about DeFi have spread DeFi from a niche to the masses.

"Matryoshka" mining kicks off DeFi bull market

"Compound liquidity mining is a *****, but it is not a detonation point." Pan Chao thinks so because he thinks Compound was still a game for a few people at the time. It was not until YFI went online that the "snowball" rolled bigger and more people joined in. On July 18, the DeFi protocol yearn.finance officially launched the sub-governance token YFI. Users can obtain tokens by providing liquidity to the platform's aggregated liquidity pool. Unlike early fundraising and distribution of tokens to investors such as Compound, YFI adopted a token distribution method with a strong blockchain spirit, 0 private placement, 0 pre-mining, and a total of 30,000 tokens were all produced through "mining", and DAO governance was opened. After YFI was launched, it quickly became popular among many big Vs in the currency circle. Its business model is also very innovative. Yearn.finance focuses on the concept of aggregators, which can intelligently automatically allocate and transfer the tokens it expects to borrow between dYdX, Aave, and Compound to allow users to obtain the highest returns. This product was later figuratively referred to as a "machine gun pool".

YFI has entered the mainstream crypto world mainly due to its exaggerated increase and price. According to data from Feixiaohao, YFI broke through $1,000 from $3 five days after it landed on the market; it took another month for the price to be pushed up to $8,900, equivalent to 0.72 BTC; after landing on the mainstream CEX, YFI continued to rise, and finally exceeded $44,000 on September 13, which is approximately equal to 4.15 BTC. In the past, surpassing the price of Bitcoin was just a slogan, a boast, and a pie in the sky from various project coins. As a result, it was achieved by YFI in the DeFi track in 2020.

YFI's highest rise of more than $44,000 is almost the most glorious moment of the DeFi sector. During this period, the "nesting doll" mining model launched by Yam further boosted market enthusiasm. At 3 a.m. on August 12, the DeFi project Yam.finance (sweet potato) started liquidity mining. Unlike the self-mining model within the protocol such as Compound and YFI, Yam has opened 8 liquidity mining pools, and users can pledge YFI, Weth, COMP and other assets to participate in "mining sweet potatoes". In the early days of the launch, the highest annualized return on mining YAM tokens reached 22,000%. Various people, including Authur Hayes, the founder of BitMEX, have become "farmers" to compete for the first mine. In just 6 hours, the value of Yam's locked assets reached 200 million US dollars. Under the "sweet potato effect", the collateral assets that can be used for mining have all risen, and the "nesting doll" model has begun to show its power.

The big V in the currency circle "Super Bitcoin" called it "a brave new world of bubbles". Although Yam was only crazy for 36 hours due to the issuance bug, it became the beginning of "Farming for All". Similar "nesting doll" mining projects have emerged in large numbers, and more and more "old leeks" have learned on-chain operations and become "farmers". People grow grapes (GRAP), make sushi (SUSHI), pickle kimchi (Kimchi)... This wave of DeFi brought about by yield farming has also spread to public chains such as EOS, TRON, and IOST. Even Binance, the representative of centralized exchanges, has quickly developed Binance Smart Chain to attract DeFi protocols.

Projects such as Justswap, DFS, Defibox, Coral, SUN, and BEST KITCHEN have appeared on these public chains. Centralized exchanges have also launched DeFi tokens at an average rate of 10 per month, and the entire DeFi ecosystem is unprecedentedly prosperous. A milestone worth noting is that on September 1, Uniswap's total transaction volume exceeded US$10 billion, setting a record for DEX. According to OKEx data, from June 1 to September 1, the total market value of Ethereum DeFi projects increased from US$3.15 billion to US$17.74 billion, an overall increase of 463.17%. The rise of DeFi has brought about a small bull market for DeFi assets.

The bubble bursts and DeFi enters a stable development period again

In the past three months, everyone in the blockchain industry has been talking about DeFi. It has become the dividing line between "new leeks" and "old leeks". It seems that if you don't participate in DeFi, you will be abandoned by the times. However, in the explosion of "yield farming", people found that many projects emerged just for "mining for mining", and did not generate actual value. In essence, they were still playing a money game. At the same time, many fake agreements with no team, no audit, and no open source have appeared on DEXs such as Uniswap. They are called "dog" projects. Various scams and chaos are attached to the hot land of DeFi.

After participating in several mining projects, Denny, the Chinese representative of the Defibox Foundation, believes that the DeFi market lacks rationality and that most liquidity mining is essentially a zero-sum game. The market trend also confirms the existence of bubbles. In September, the tokens of DeFi projects all fell. The SushiSwap governance token SUSHI, which was once popular due to liquidity mining, fell from a high of $13.4 to less than $2, and now only quoted at $0.65. The prices of most DeFi assets, including YFI, COMP, and BAL, have been halved, and the yield of participating in DeFi projects has dropped sharply. This wave of small bull market is almost coming to an end.

On September 17, the king-level project Uniswap once again aroused market enthusiasm by airdropping coins. The governance token UNI rose from about US$2 to a maximum of US$8.66, and the DeFi market experienced a few days of jubilation. However, Uniswap ultimately failed to "save the market" alone. As October approached, DeFi began to cool down across the board. According to OKEx Cloud Chain data, on October 29, the total market value of Ethereum DeFi assets was US$10.15 billion, down 42.78% from the high of US$17.74 billion on September 1.

The total market value of Ethereum DeFi assets has shrunk by 42.78% from its peak. "With less speculation and the departure of hot money, asset prices and market heat will decline." Pan Chao said with a smile that gravity has begun to take effect. He believes that DeFi assets have risen too much before, and the fall is a kind of value return. Now DeFi is not cold, but has returned to a stable development period. The bursting of the bubble is a good thing. The development of DeFi technology is more optimistic, and the industry has begun to pay attention to the right path.

Over the past month, some people have begun to turn their attention to the mainstream asset market represented by BTC, while others continue to delve into different business sectors in the DeFi field, including oracles, NFTs, and so on. Andre Cronje, founder of Yearn Finance, also continued his DeFi experiment. On October 28, he launched the decentralized on-chain service outsourcing network, Keep3r Network v1 beta; decentralized synthetic asset issuance and trading protocols such as Organix were born on the EOS network. At the same time, in order to solve problems such as high Ethereum gas fees, many DeFi protocols are competing to explore Layer2 expansion solutions. Uniswap is developing version V3, and its founder Hayden Adams said V3 will "solve all problems"; Synthetix is ​​also moving towards L2 Synthetix. In September, the protocol was upgraded twice to reduce gas fees.

"This small explosion of DeFi has accomplished its historical mission," Pan Chao said. More and more people are beginning to pay attention to DeFi and learn on-chain operations. Many developers are studying how to build innovative DeFi applications, and the ecosystem has grown. Of course, in the eyes of Pan Chao and Denny, DeFi is still far from being truly popularized. In Denny's conception, the ideal world of DeFi is that users can hold mainstream digital assets and borrow, loan, trade, and mortgage anytime, anywhere.

Financial services that are not easy to achieve in the real world can be quickly realized through blockchain, achieving financial inclusion. "When the user scale reaches 2% of the world's population, or 150 million, DeFi may have a real large-scale outbreak. I estimate it will take one or two years." Wen Hao, the developer of BitTorrent Wallet, revealed to Honeycomb Finance that as a wallet service provider, he has also been iterating and upgrading the wallet to make it safer and easier to use, helping users to access the blockchain world more easily. In his eyes, when Ethereum 2.0 gradually lands and the infrastructure is complete, DeFi, as a basic financial service, will have long-term data growth.

From 2015 to 2020, DeFi explored decentralized lending, trading, "banking" and other scenarios step by step. During this period, explorers such as Maker, Aave, and Uniswap have survived to this day; there are also projects such as EtherDelta and BitShare that have faded out of history after completing their enlightenment mission. Looking at the development of DeFi over the past five years, it has gone through an unknown era, crossed the bull and bear markets, and then entered the mainstream vision in 2020 relying on liquidity mining. Although there are many bubbles in it, DeFi has verified its feasibility and shown its potential to the outside world. Pan Chao hopes that people can gradually forget the word "DeFi". As DeFi and CeFi gradually combine, the underlying protocol becomes more and more mature, centralized assets and physical assets are seamlessly connected to the DeFi world, and users can get the efficiency and convenience brought by DeFi without feeling. When everyone no longer mentions the concept of DeFi but uses it, the era of DeFi will truly arrive.