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DeFi (Decentralized Finance). One of the most significant triggers was yield farming, an investment method that started around June 2020 and has an unthinkable interest rate.
Yield Farming, which was established by various DeFi protocols distributing governance tokens to users, brought a new inflow of billions of dollars into the DeFi sector. According to DeFi Pulse data, which records the amount of money deposited in the DeFi protocol, the deposit amount increased from about $ 1.1 billion on June 1, 2020 to about $ 11 billion on October 5. doing. It means that the amount of money that users manage with DeFi has increased tenfold during the four months when interest rates have risen dramatically.
Since many people learned about DeFi because of yield farming, there is a tendency to equate DeFi with yield farming, which is an unavoidable phenomenon considering the degree of attention. However, DeFi development has a long history, and yield farming is only a part of it.
DeFi begins with ICO and DEX (Distributed Exchange)
DeFi is a financial function that can be realized by using smart contracts on the public blockchain. Ethereum (ETH) and ERC20 tokens automatically move between addresses according to the conditions specified in the smart contract code. ICOs and DEXs are well-known examples of the first use of this.
From 2016 to early 2018, the Ethereum-based application development team conducted an ICO (Initial Coin Offering) to raise funds. In a broad sense, this method of deploying smart contracts that manage unique tokens and realizing token issuance and ETH procurement without a broker can be regarded as part of DeFi.
As a result, there will be demand to buy and sell the numerous tokens created by ICO. It was possible to buy and sell on conventional exchanges such as Binance, but we have also advanced the development of applications that realize token trading functions by smart contracts without the need for brokerage of such exchanges.
This is DEX (Decentralized Finance).
DEX like EtherDelta, Bancor in 2017, Kyber Network in 2018, 0x project are already up and running, giving users the option to buy and sell ETH and ERC20 tokens independently of the exchange. It was. When it comes to buying and selling tokens, the foundation of DeFi is complete.
At the end of 2017, DeFi-leading MakerDAO launched DAI, a decentralized stable coin. Among cryptocurrencies and tokens with volatile prices, the advent of DAI, which always maintains a price close to $ 1, has added great convenience to token trading by DEX.
Around 2018, 2019
Birth of "DeFi" community and expansion of DeFi ecosystem
In addition to DEX, which buys and sells tokens, the development of products with more complex financial functions will proceed. In order to support such a movement, around August 2018, DeFi's community activities will start at the request of overseas developers. At first, the connection was only to discuss and exchange information on the chat app Telegram , but gradually it became commonplace for the DeFi development team to provide mutual aid in funding and development through events such as hackathons.
The impact of this community activity is enormous and has triggered the birth of many DeFi projects that are currently attracting users.
From 2018 to 2019, more than just DEX, a variety of DeFi protocols will be launched.
Compound that allows you to lend and borrow tokens with smart contracts
Betoken, a diversified hedge fund
Fulcrum that enables margin trading
TokenSets that automatically rebalances the portfolio according to the conditions
Opyn offering options trading
Functions handled in traditional finance, such as, are expressed in Ethereum smart contracts. Many products have succeeded in quickly gaining users.
WBTC, which distributes the value of Bitcoin on Ethereum, has also been distributed since October 2018, and has steadily penetrated these protocols to this day.
Uniswap, the most famous and huge DeFi protocol, is DEX, which started in November 2018. Uniswap gained user support for its more pure decentralization .
Big mistakes and the epidemic of yield farming
In 2020, the DeFi ecosystem has become wider and deeper, with DeFi alone sufficient to operate cryptocurrencies and tokens. The variety was plentiful, the funds were raised, and the liquidity to handle them was large enough.
On the other hand, of course, hacks and accidents aiming at the funds collected in DeFi will also occur. The following are the main events.
Fulcrum Flash Loan Hack
DeFi is constantly developing new technologies, one of which is flash loans. It is a technology that allows you to borrow ETH and tokens without collateral if you make repayments within one block.
In February 2020, hackers used this technology to successfully withdraw bzx funds.
In addition, MakerDAO's collateral settlement did not function properly even in the March market plunge, resulting in a large debt as a protocol. Fortunately, users haven't suffered any concrete losses, but since then there have been multiple hacks across DeFi, a time when challenges have been highlighted.
From June 2020, DeFi's hottest project, Compound, will begin distributing the Governance Token COMP to its users. This is to give token holders the right to decide on the operating policy of the protocol.
Many users moved their funds to Compound for COMP, so they decided to take a share within DeFi at once.
Immediately after this
Yearn Finance （YFI）
Etc. distribute governance tokens in the same way. YAM, SUSHI, etc. with the names of foods will also appear, and yield farming.Governance tokens, which determine the direction of the protocol and in some cases generate revenue, play an important role in DeFi.