What have we learned from the ups and downs of DeFi ?

6 min readOct 28, 2020


JP Morgan once called Bitcoin a fraud in 2017, even worse than the tulip bubble; Now it says it will compete with gold, with huge long-term rising space. From pyramid schemes to important innovations that have the chance to shake up traditional finance, the blockchain industry, represented by Bitcoin, is growing rapidly and has its investment opportunities every once in a while.

After the recent DeFi boom, the market has calmed down temporarily, and new hot spots are still in the womb. This article will reflect on this year’s DeFi wave triggered by liquidity mining, and explore the next possible outlets and investment opportunities.

Whose cheese was moved?

Photo by Katrin Leinfellner on Unsplash

DeFi is not a new concept, the current DeFi leader MakerDAO was founded in 2017, and the originator BTS has existed since 2014, but the burst is happening in 2020.

In mid-April, decentralized Lending Compound launched its governance token COMP and in less than two months, it surpassed Maker and became DeFi’s no. 1 in market value, which officially kicks off the era of DeFi 2.0. In the same period, a decentralized trading platform, Uniswap, rose to prominence and attacks centralized exchanges with its no-fees advantage. Over the same period, the year’s biggest dark horse — -Yearn. finance went up 10,000 times in 43 days. The total lock volume of DeFi is also about 20 times higher than at the beginning of the year. In its heyday, DeFi managed to spark FOMO among investors and even got the attention of regulators like the SEC in the US.

However, since mid-September, the price of the DeFi leading projects has been falling, with COMP, UNI and YFI all went down about 70% from their highs. DeFi is bursting like a bubble. At the same time, there were rampant counterfeit tokens, cashing out founders, the lack of code security audit, smart contracts flaw…… With all kinds of strange phenomena emerging, DeFi was soon criticized and shorted by the community.

DeFi’s rise has been sudden, but what has caused this boom to fade so fast? Whose cheese did it move? In fact, there are many reasons, but from the market trends and information, you will find that the most direct counterattack is the entry of centralized exchanges. In order to avoid the outflow of funds and missing the hot spot, CEX launched DeFi token in a frenzy in mid-late August, and then opened DeFi board exclusively, and even lowered the listing threshold in the face of heat, which helped the DeFi craze reach its peak, but also accelerated the decline of it.

Since September, many CEXs have entered to conduct liquidity mining and manage DeFi tokens on behalf of users. This greatly reduces the barriers and risks for traders to participate, making the high-risk DeFi projects gradually return to the normal range of returns, and the original “80/20 effect is meaningless.

In addition, with the stagflation of the token prices, the liquidity mining enters into a vicious cycle: under the mode of “mining-selling-withdraw”, big miners earn tokens by providing liquidity, and then withdraw and sell it, which forms a selling pressure on the token price again. With buyers in the secondary market on hold and negative news coming out, the DeFi hype has lost its momentum.

Only bubbles? or financial innovation

Why did Maker and earlier BTS not form the DeFi craze? Is DeFi just another financial bubble with no value?

In fact, the rise of DeFi this time is not an accident, but a technological and product-driven financial innovation. Its temporary retreat is due to excessive speculation but does not mean there is no support.

Let’s start with financial innovation. Lending leader Compound innovatively introduced governance tokens. Both lenders and borrowers can get governance tokens by providing loan assets and borrowing assets. The introduction of governance tokens stimulated the enthusiasm for participation in the market. There has been a significant increase in both the number of assets available and the amount of lending in the Compound application.

In fact, the natural business of Compound is essentially securities margin trading. The proliferation of Compound applications has made trading in digital assets more dynamic. Users can borrow digital currency at low-interest rates from Compound applications and then apply it to higher-yielding digital asset transactions. According to data, Uniswap, the DEX leader, saw a significant increase in trading volumes over the same period.

Uniswap’s constant function model allows users to exchange tokens directly in the exchange pool, which not only changes the old order book transaction model, but also lowers the barriers to market-making, allowing each user to become a market-maker for a trading pair and share the fee income. This is particularly attractive for borrowers who have successfully capitalized on the Compound. Uniswap’s innovative mechanism to some extent preempts users and traffic from traditional centralized exchanges, which is also where Uniswap has been more successful than previous DeFi projects.

Yearn.finance is equally innovative as a decentralized financial platform with complex features such as aggregation liquidity pools, leveraged trading platforms and automated market-making, which can help to redistribute the token lent by investors automatically between dYdX, Aave and Compound for maximum returns.

This series of financial innovations together contributed to the DeFi boom. These innovations have important value, which successfully transferred the original centralized financial facilities to the blockchain. And it is the most important significance for the development of blockchain in this round of DeFi boom.

DeFi’s future driven by tech and products

To answer the previous question: Why does DeFi’s financial innovation pile up in 2020?

In essence, if there is only financial innovation, and no corresponding blockchain technology and ecological development, DeFi won’t burst this time. Using the Compound we mentioned above as an example, oracle is essential. It can provide on-chain prices that can be referenced by smart contracts for various DeFi applications, such as decentralized lending. Users of decentralized lending can lend or borrow based on the price of the oracle to avoid the deviation of the borrowing price from the market price, resulting in losses. It can be said that the maturity of common tools such as oracles is an important support for the large-scale emergence of DeFi applications.

The role of oracles is actually more powerful than expected. Currently, the lock-up assets in the application of DeFi are still mainly on-chain assets. However, in the future, there will be more off-chain assets and oracles can realize the data interaction between them, which will allow the DeFi application scenario to be expanded more widely.

With the release of governance tokens in the DeFi project gradually completed, DAO is also important technical support for the future development of DeFi. DAO is not a new concept. In 2016, The DAO, which is based on Ethereum blockchain platform, was born. However, due to the vulnerability of smart contracts, huge funds were transferred by hackers. DAO can realize the equity structure table, token conversion mechanism, voting, job appointment, financing and accounting, which is needed to establish an online version company type on the blockchain. As the DeFi project moves into community governance model, DAO needs to provide more mature and sophisticated governance capabilities to ensure that DeFi thrives.

In addition, the interconnection of all things and the interconnection of chains are not only the theme of times but also the bottleneck that the blockchain industry urgently needs to solve. DeFi projects are still based on Ethereum, and the future development of cross-chain technology is important and urgent. Cross-chain technology can enable more private chains and public chains to communicate, and break the island effect, support more assets to be on-chain, meet more real transaction needs, and promote on-chain financial prosperity.

It can be seen that, under the bubble, the infrastructure such as oracles, DAO architectures and cross-chain technology are quietly evolving and maturing, and is poised for the next wave of DeFi upsurge.

Article from Odaily

Translated by Yang(Milian Tech)




To translate some latest policy and issues on blockchain and fintech happened in China