Exploration: Ethereum breeds the prototype of DeFi

On October 26, DApptotal data showed that the locked amount of MakerDAO reached 1.8 billion US dollars, a record high. Who would have thought that 5 years ago, Maker's idea of ​​mortgage lending was just a white paper.

It was at that time that, like Maker, many ideas about building financial applications on decentralized networks entered the exploration stage. With the mining of the Ethereum Genesis Block in July 2015, developers could deploy smart contracts on this simple decentralized system. Within two years, decentralized stablecoins, mortgage lending, and DEX trading platforms went from white papers to beta applications.

These applications were not called DeFi at that time. Although the Bitcoin market reached its peak at the end of 2017, decentralized financial solutions were lonely and niche. It was inconspicuous when ICO and the slogan of "blockchain revolution" came, quietly exploring in small corners outside the mainstream market, including the predecessor of today's top DeFi protocols Maker and Aave.

MakerDAO started out as a joke

As a protocol for creating the stablecoin DAI, MakerDAO is now an indispensable infrastructure in open source financial protocols. On October 26, its total locked value (TVL) reached 1.8 billion, breaking the record again and becoming a regular in the top three on the DeFi value list.

It took MakerDAO five years to go from a white paper to a locked-up fund of $1.8 billion. Five years ago, it was just a concept.

In August 2015, MakerDAO released its white paper. DAI was not yet given the concept of a stablecoin. It was defined as "the first transferable and interchangeable crypto bond." The issuer (borrower) can issue DAI by locking up valuable assets, thereby obtaining stable and low-risk interest income, which comes from the issuer's collateral assets.

At that time, domestic Bitcoin players active in the Babbitt community were not interested in this emerging thing. Under the screenshot of the English version of the white paper, some people questioned its origin, saying that it was "putting on a foreign vest to fool people"; others thought that the protocol was too complicated and "those who don't like to use their brains should not play it."

DAI's early white paper (picture from Babbitt)

New things with complex models are not popular in the crypto world where buying and selling Bitcoin for profit is king. But what else can a decentralized encrypted network like Bitcoin do besides trading? This has become a topic of exploration for some geeks and scholars at the time.

Open source financial applications have become a trend, but the efficiency that the Bitcoin network has given up for security has become a pain point for application developers. The market lacks a stable and efficient decentralized network to carry ideas similar to Maker.

The emergence of Ethereum provides an alternative. One month before the Maker white paper was published, in July 2015, the first version of the Ethereum mainnet, Frontier, was released. The mining of the genesis block meant that the network was up and running. This initial generation of the network only opened mining interfaces and the scheme of uploading and executing contracts to users, but this simple network at least had the possibility.

This version of the Ethereum network has no graphical interface, so all operations need to be performed through the command line. The Turing-complete Solidity programming language is aimed at smart contract developers and is not very friendly to ordinary programmers. At that time, Ethereum release coordinator Vinay Gupta once issued a message to remind developers that Frontier is the "most initial form" version of Ethereum and developers should act with caution.

The simplicity did not seem to hinder testing. Augur, a prediction market (binary options trading) based on Ethereum, released a beta version and a tutorial. The project received $5.2 million in funding at the time. The financial scenarios involved in Augur can be regarded as an early exploration of DeFi on Ethereum. Although there was no concept of DeFi at that time, it still survived with Ethereum to this day.

In addition to Ethereum, Bitshare is also a network that application developers can choose. It is a concept proposed by EOS founder BM in the early days, allowing users to use the delegated proof algorithm to build peer-to-peer distributed stock ledger accounts and networks. The Bitshares mainnet was launched as early as 2014. In the month when the Ethereum mainnet was born, overseas venture capital group Peak announced the use of the Bitshares 2.0 network and integrated it into the company's business.

BitShares was once considered a model for the implementation of blockchain technology in financial scenarios. When the 8btc community saw the plan for DAI, someone left a message saying, "It's better to do BitShares than DAI." No one expected that DAI and Ethereum, which were not optimistic at the time, have now become the protagonists of the encrypted asset world, while BitShares, which lacks ecological construction, has become marginalized.

TheDAO, a crowdfunding track that attracts money, sounds the alarm

The gradual improvement of infrastructure has brought more room for developers to display their talents, and funds have quietly entered the market, paving the way for the exploration of open source financial applications based on distributed networks. The initial scenario for large-scale applications was crowdfunding.

In October 2015, WeiFund, an open source crowdfunding platform based on Ethereum, was launched. Up to now, this platform is still providing services to users.

In the context of DeFi, although the waves caused by WeiFund did not cause big waves, its emergence proved the value of developers trying to use smart contracts to build crowdfunding scenarios.

Weifund early webpage

At that time, someone on Babbitt left a message under the introduction of WeiFund, saying that crowdfunding applications were very popular at the time, "It seems that there are many such platforms and too many crowdfunding applications."

The emergence of "TheDAO incident" also indirectly confirmed this popularity. In May 2016, the largest crowdfunding project on Ethereum, DAO, raised nearly $60 million. The influx of a large amount of funds attracted the attention of hackers, and disaster struck.

On June 17, due to a major flaw in the smart contract, TheDAO was hacked, resulting in more than 3 million ETH assets being forced to be separated from the funding pool. According to media information at the time, before the attack, the crowdfunding platform's funding pool had about $100 million in assets.

In order to recover the assets, the Ethereum network implemented a soft fork to roll back the transaction. Before and after the execution, the community had been divided on whether to roll back the transaction. The disagreement was resolved by the coexistence of two chains, and ETC Ethereum Classic (the original chain network) was born.

TheDAO also terminated its service. This incident is still an important case in the field of blockchain network security. Smart contract vulnerability incidents are still a key topic in the industry. Developers always mention the warning brought by TheDAO incident when discussing security.

In addition to smart contracts, wallets are also an important part of DeFi’s ability to move beyond the niche circle. If smart contracts are the entrance to the application scenarios, then wallets are the door for users to enter the scenarios.

In 2016, the Homestead upgrade of the Ethereum mainnet provided tools for “gatemaking.” The Homestead upgrade made three important changes: removing the Canary contract to remove the centralized part of the network; introducing new code in the contract programming language Solidity; and most importantly, the upgrade brought the Mist wallet, allowing users to hold and trade ETH and more conveniently write and deploy smart contracts.

As more and more financial applications try to use smart contracts, some traditional financial institutions have also begun to pay attention to open source financial protocols on Ethereum.

In June 2016, UBS (United Bank of Switzerland) tested smart bonds on Ethereum, which means that traditional financial institutions began to try to put financial scenarios into open networks at a very early stage.

Smart bond developer (picture from Babbitt)

After crowdfunding and bonds, trading applications also came in October 2016, when the Ethereum-based decentralized exchange IDEX was launched. In order to circumvent the inefficiency of the Ethereum network, it adopted an order book model, supported restrictions and management of orders, and achieved high throughput and real-time transactions through off-chain matching and on-chain clearing. IDEX became a platform on Ethereum that could conduct multiple transactions simultaneously.

Open source finance, which is a field where funds are gathered and traditional financial institutions are involved, is budding and being explored in the development of Ethereum.

DEX iteration: the birth of today’s mainstream protocol

In 2017, the open source financial protocols on Ethereum became more diverse. In addition to crowdfunding and trading, lending protocols that play the role of commercial banks finally appeared in the form of applications.

In September, EtherDelta, an iteration of IDEX, was launched. Compared with the off-chain matching of the former, EtherDelta is closer to the purpose of blockchain decentralization and high invisibility. It has the characteristics of encrypted signature transactions and does not require account login, allowing users to use it safely in any corner of the world.

EtherDelta also became the first stop for early exploration of decentralized trading in China. Denny, the Chinese representative of the Defibox Foundation, recalled that EtherDelta was the first DEX he used. "At that time, I was in the mood to explore on-chain transactions, but the overall experience was still affected by the performance of Ethereum, which was too slow."

In addition to Ether, the MakerDAO protocol, which has been in concept for two years, has finally come out of the white paper. Some people have started to deposit ETH into it and become the issuer of DAI. DAppTotal data shows that on December 18, 2017, the locked amount of MakerDAO was $190,000.

Pan Chao, the head of the China region who joined the Maker team that year, believes that compared with today's market, MakerDAO was the DeFi at that time because it built a mortgage lending financial system in a decentralized protocol and generated stablecoins, one of the most important infrastructures in the trading world. Pan Chao joined the team at that time because he valued the stablecoin scenario, "there was no concept of DeFi at that time."

But for open source financial experimenters like Maker, it was almost impossible to attract attention in 2017. At that time, the entire market was crazy about ICOs, and the focus of the mainstream market was to use ETH to find small currency investments.

Pan Chao recalled that in 2017, the focus of the cryptocurrency circle was on ICO, and few people paid attention to decentralized applications. It was so niche that only professional developers would use these financial protocols. But despite the small number of protocols on the market and low attention, the mainstream DeFi protocols on the market today, such as the lending protocol Aave and the derivatives trading platform Synthetix, all had their prototypes at that time.

In November 2017, Aave was not called Aave. Its predecessor was ETHLend. The scenario attempted by this protocol is mortgage lending. Users can use their own digital currency assets as collateral and borrow ETH to participate in token crowdfunding or conduct short-term arbitrage. In the early stages of protocol development, it issued 1 billion LEND tokens and raised ETH worth $600,000.

It was not until September 2018 that ETHLend was renamed Aave. Not only has it survived to this day, but it has also become a mainstream application. Currently, DAppTotal data shows that Aave's locked amount is US$1.09 billion, ranking fourth in TVL.

In addition, Synthetix, the leading platform for derivatives in the current DeFi protocol, was also launched in 2017. At that time, the platform was called Havven, and initially it wanted to focus on stablecoins, called nUSD. However, later on, the team's development shifted to trading prospects. At the end of 2018, the synthetic asset protocol platform Synthetix was re-launched.

Three of the top 10 DeFi protocols by locked amount were created before 2017

The prototypes of these three popular applications, Maker, Aave, and Synthetix, were all born before 2017. Why did they become so popular only this year?

Denny believes that the gradual maturity of Ethereum provides an entry point for infrastructure and capital. The market itself has certain needs for on-chain transactions and lending, especially in overseas markets. "After the theft of MT.Gox, the world's leading exchange, many investors have a sense of crisis about storing assets in centralized exchanges. Everyone began to look for alternatives, and on-chain transactions came into view."

Looking back, the current DeFi explosion is not accidental. The birth of the Ethereum network, developers’ attempts at on-chain financial scenarios, and early funding support have all laid the foundation for DeFi to become a track, but from 2015 to 2017, it had not yet occupied the main field of the crypto asset world. In an undefined era, it lived in a small corner outside the mainstream market and evolved silently.

In 2018, the explosion of public chains has become a fuel, and some people have given chain finance a name...

(To be continued…)