DeFi has been making a lot of noise recently, but it’s perhaps more established than most people think.
MakerDAO was founded in 2014, development started in 2015, with lofty goals of creating a “decentralized digital economy.”
The decentralized stablecoin “DAI” was launched in 2017, which can probably be counted as the birth of DeFi.
MakerDAO began slowly picking up locked value over a 3-year period, until July of this year, when the amount of crypto locked in DeFi jumped from $1 billion to an incredible $12 billion in just 3–4 months over the summer.
Up until this moment, DeFi was very much a niche subset of the crypto space, now it’s got all the hype. So wtf happened?
In June of this year, Compound released $COMP, a governance token for its lending platform, which jumped from around $60 to over $300 in 4 days. It’s worth remembering that we hadn’t seen a 5X in a legitimate altcoin for a long time in the crypto space. It was a long, cold bear market.
As crypto analyst Tarun Chitra calls it, this was the dawn of the “Agricultural Revolution” and the onset of the yield farming craze. The $COMP token was distributed to users on their platform for providing liquidity, in a process called “liquidity mining”.
This concept was picked up and expanded upon by Andre Cronje’s yearn.finance project, a liquidity routing “yield optimizer,” which launched another governance token $YFI. YFI went from trading at a few tens of dollars on Uniswap, to trading at more than $40,000 with a MarketCap ATH of $1.3 billion, and listed on most of the major exchanges in a matter of weeks. The DeFi party had truly started.
At the same time, Ampleforth, a strange crypto-economic experiment / money game, jumped from having less than $10k liquidity on Uniswap in May to nearly $100m by August, by utilizing their “Geyser” contracts, which incentivized liquidity providers on Uniswap to build depth on their market by buying AMPL and staking their ETH in the liquidity pool.
This combination of governance, incentivized liquidity and yield optimization all wrapped up in nicely packaged open source code, generated a frenzy of forks, clones, “food coins” like 🍠 and 🍣 and other craziness that generated a market exuberance that it seems can only happen in crypto.
It also generated a new level of complexity that only crypto dorks would find exciting — early adoption at its best.
DeFi 2.0 Design Paradigms
Just like the 2017/2018 cycle, the DeFi mini-boom has coughed up some interesting design paradigms that will take DeFi (and the degens) into its second generation:
- Governance: This wave of DeFi came packaged mostly with governance tokens, and for good reason, they are the route to decentralization in the space. They allow the transition of power away from network creators to the crowd, and a far more coherent argument for being a utility rather than a security token. It’s not an easy process though and the next-gen of DeFi will take this far more seriously, developing processes and understanding in their communities that build towards genuine crowd control. Not just a “forum and run,” exit-to-community strategy (insert Rug Pull here).
- Accessibility: Yield farming is exceptionally complicated and even on the billion-dollar TVL products, the front ends and UX were often laughably bad. The new era will make it far easier for everyday early adopters to take part and maybe even drag in some normies while they’re at it.
- Safety: Safety in DeFi is a relative term. It’s very easy to make costly mistakes with smart contracts and the next wave of DeFi will take these risks seriously. On top of that, they will ensure that their token economics are viable, avoid asymmetric token distributions, supply shocks and governance capture attacks.
- Sustainable: Most of the yield farming craze was driven by hyperinflation of their token economies, sometimes emitting their entire token supplies to early adopters in a matter of weeks. This lead to people complaining they were only getting 300% APYs — hopefully those days will disappear as projects with real revenue models will begin to generate sensible returns, and token demand and price will equilibrate around those variables.
This DeFi wave got real silly real quick, but the liquidity that entered the space has stayed in the space and a new wave of new projects were generated that have the potential to lead the pack in the next generation of DeFi and all closely follow these important principles. A new style of emoji to define this new wave of tokens is still TBD.
DeFi 2.0 Projects to Watch
Finance.vote
Finance.vote is one of the projects that is taking governance very seriously. They aim to be the consensus layer for DeFi, releasing a range of voting technologies that provide more sophisticated means of allowing humans to interact with blockchains.
They launch with a hybrid of quadratic voting and prediction markets they call “vote markets” that allow users to be rewarded for their research and for making accurate predictions on the crypto markets.
The platform uses a multi-token system for handling digital identity, vote power and incentivization and plans to release a “second layer governance” system that promises to provide token specific miniDAOs, where users can build influence based on dialogue and not just purely plutocratic token stake. These components merge with a social trading functionality that aims to evolve into a crowd run crypto-economic hub and a central component in the DeFi space in the future.
Pollen
Pollen is a decentralized asset index that solves two fundamental issues: Firstly it provides a safe and sustainable governance asset. This is achieved via an innovative governance model that is designed to be accessible while maximizing yield.
Secondly, it produces an uncorrelated asset that is specifically designed for use within the DeFi ecosystem, allowing new ways to grow, breaking free from volatile markets to enable new classes of products and services. Although uncorrelated, the PLN asset is designed to always outperform the market.
The platform uses governance algorithms and second layer scaling to solve many of the accessibility issues currently experienced in today’s DeFi ecosystem.
Colony
As I mentioned earlier in this article, effective on-chain governance will need to become the keystone of all tokenized cryptosystems. Like MakerDAO, Colony was one of the very first projects announced on Ethereum back in 2015. Since then, they’ve quietly been building, and are at the cusp of launching what is certainly the most powerful, practical, flexible, and accessible DAO framework in the world.
Unlike the laughably bad UX found in other governance frameworks, Colony makes DAOs easy. Colony’s application seamlessly integrates powerful DAO functionality like payments, teams, budgeting, permissions, reputation, decision making, revenue sharing, and arbitration into an experience that is polished, logical, and easy to use.
DAOs have become synonymous with voting. However, voting on every decision imparts unnecessary and impractical coordination costs on an organisation; no “real world” organisation works this way. That’s why Colony operates according to a more agile system of ‘lazy consensus’, enabling organizations to spend their time getting stuff done, instead of endless voting.
Power Trade
PowerTrade’s mobile-first crypto options platform makes options trading on-the-go easy for newbies and pro’s alike. PowerTrade is launching with BTC and ETH options, and will expand to other alts, as well as structured products.
The PowerTrade Fuel token (PTF) is a DeFi alternative to an exchange insurance fund. The DAO manages a treasury which the PowerTrade exchange contributes to, and provides cover to users if there is any shortfall in the margining system. Token holders vote on coverage events and manage the treasury by hedging against open risk on the exchange or lending treasury funds for yield.
Here’s where you take your alpha and go.
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