Is DeFi no longer working? Little do people know that the gears of destiny have long been set in motion.
Unbeknownst to many, the gears of destiny have long been set in motion for DeFi.
Author: Day; Plain-language Blockchain
Since the DeFi Summer of 2020, after years of development, although the entire track has become gradually improved, giving rise to various infrastructures, the price performance of traditional DeFi blue-chip tokens such as UNI, LINK, AAVE, SNX has been extremely poor after reaching its peak in May 2021. They seem to be gradually forgotten by the market hotspots, once again confirming the industry’s “fickle” concept of favoring the new and discarding the old.
Even recently, the term “DeFi overrated blue-chips” has been circulating in the community. Readers have become numb to DeFi, and media article titles with DeFi are sure to have low readership. Some people are not even interested in reading anymore because, in the short term, it has no investment value and only focuses on technology. How many people can truly be interested?
However, on the other hand, it is undeniable that DeFi (Decentralized Finance), which does not rely on outdated and inefficient infrastructure, but instead builds a financial system using blockchain technology to provide services such as trading and borrowing against encrypted assets, has long become an indispensable part of the blockchain industry. Recently, traditional DeFi blue-chips such as UNI and MKR have been making various moves, and this article will briefly summarize the changes from DeFi 1.0 to DeFi 3.0 and introduce the innovations in each stage.
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01 DeFi 1.0: The establishment of the basic framework
DeFi 1.0 is the early history stage of the rise of decentralized finance, mainly completing the establishment of the basic framework for financial services on the blockchain, introducing several key concepts, such as stablecoins, AMM DEX, borrowing, liquidity incentives, and incentivized staking.
Notable developments and innovations in the DeFi 1.0 stage:
The rise of stablecoins such as Tether (USDT), USD Coin (USDC), and DAI, which serve as value exchange mediums, providing a basic foundation for transactions and borrowing within the DeFi ecosystem;
The emergence of AMM (Automated Market Makers) and liquidity incentives, providing incentives for DEXs like Uniswap and Curve to achieve peer-to-peer transactions without intermediaries;
The emergence of borrowing platforms such as AAVE and Compound, allowing users to earn interest on their crypto assets or borrow against them using crypto assets as collateral;
The emergence of incentivized staking, incentivizing users to provide liquidity for DeFi platforms by rewarding them with governance tokens. It serves as a major catalyst for the development of DeFi, increasing DeFi TVL from millions to billions.
DeFi 1.0 played a crucial role in establishing the basic framework of DeFi and had a significant impact on its development. However, at the same time, there were also some issues.
The development of DeFi 1.0 was mainly focused on Ethereum. Due to the scalability issues of Ethereum itself, the cost for users to participate was not low. In addition, although incentive staking has achieved great success in DeFi, liquidity providers come solely for high rewards, with no loyalty. Once the rewards are canceled, customers will leave, leading to a price collapse and the project entering a death spiral.
Furthermore, when token prices experience significant fluctuations, liquidity providers also face the risk of losses (impermanent loss). Liquidity is distributed across different platforms, and dividing and providing liquidity locks up capital, resulting in low capital efficiency.
Despite the various problems, these projects have laid the foundation for the current development of DeFi and have found directions for subsequent development. The project teams are working hard to overcome these challenges and drive the ecosystem further.
02 DeFi 2.0: Product Diversification and Capital Efficiency Improvement
DeFi 2.0 aims to solve the existing problems of DeFi 1.0 while expanding its functionality.
The notable developments and innovations in the DeFi 2.0 stage include:
The emergence of forks of DeFi protocols on other public chains such as BSC, Solana, Fantom, which promote asset bridging. The breakout of new public chains is everyone’s effort to avoid Ethereum’s scalability issues;
Mainstream DeFi platforms like AAVE, Uniswap, Sythetix begin supporting other public chains;
The increase in Layer 2 solutions improves Ethereum’s scalability and reduces fees;
Novel financial products are built based on the foundation of DeFi 1.0, such as derivatives, yield farms, DEX aggregators, etc;
The development of decentralized autonomous organizations (DAO) receives attention, enabling communities to collectively manage DeFi protocols;
The emergence of ve governance tokens, (3,3) model, and ve(3,3) model allows users and protocols to maintain consistent interests over a relatively long period, providing incentives for the development of protocols. The core of ve lies in users locking tokens to obtain non-transferable and non-circulating governance veTokens. The longer the lock-up period, the more governance veTokens one can obtain. Based on the proportion of veTokens held, corresponding voting rights are obtained, giving users the right to participate in community governance. Representative examples are the Curve and OlympusDAO (3,3) models, which are well-implemented in GMX;
Uniswap launches V3, concentrating liquidity and allowing users to provide liquidity within custom price ranges, improving capital efficiency and flexibility.
Compared to DeFi 1.0, DeFi 2.0 brings significant expansion of products and functionalities, marking a major transformation in the entire DeFi ecosystem. The improved development of DeFi also means that opportunities are decreasing, and people’s attention is gradually shifting to other concepts such as Metaverse NFTs, Layer 2, AI, etc.
03 DeFi 3.0: Fixed Income Products
With the continuous development of DeFi, the basic framework has been established. The Total Value Locked (TVL) has grown from zero to over $43 billion, and the total market capitalization of cryptocurrencies has reached around $1.2 trillion. The crypto industry is gradually maturing and becoming more sophisticated, with increasing funds being retained within the industry. Many users have become accustomed to investing in the industry and are optimistic about its future development, rather than immediately cashing out after making profits. Therefore, as idle assets within the industry increase, the demand for stable returns is also growing.
The emergence of ETH staking with a yield of over 4% and the annualized yield of US Treasury bonds at around 5% perfectly meets this demand. As a result, the development of DeFi is gradually shifting towards two paths: internal development – LSDFi, and external development – RWA.
Internal Development – LSDFi
As of July 28th, the total TVL in DeFi is approximately $43.2 billion, with ETH staking increasing from zero in 2020 to over $40 billion. Among them, the LSD track accounts for over $21 billion, representing about 50% of the total TVL in DeFi. It has become an essential part of DeFi and will continue to grow in the future with the increase in the market value of Ethereum and staking rates.
The emergence of liquid staking derivative solutions such as Lido, Frax, and RPL has provided greater liquidity for staked assets. At the same time, as the LSD track gradually improves and the scale of the Ethereum staking market continues to expand, LSD is also developing vertically, giving rise to LSDfi, which aims to achieve higher returns through nested layers. For more details about LSDfi, you can refer to the previous article “Ethereum’s Staking Volume Increases After the Shanghai Upgrade, LSDfi Gains Momentum”.
Binance Research Institute’s classification of LSDfi
External Development – RWA
RWA, Real World Assets, refers to the tokenization of real-world assets. The concept of RWA was first proposed in 2017, including the tokenization of real estate, luxury goods, and other assets. However, it did not take off at that time. But with the development of DeFi in recent years, the concept of RWA has found fertile ground for development.
In the first half of this year, the concept has been brought up again, and some traditional institutions have started to explore it. Goldman Sachs launched the GS DAP platform, helping the European Investment Bank (EIB) issue €100 million of digital bonds. Private equity firm Hamilton Lane tokenized a portion of its equity funds and sold them to investors. Siemens issued €60 million of digital bonds on the blockchain. BOC International (BOCI) announced a partnership with UBS Group to issue ¥200 million worth of tokenized notes.
In the field of Crypto, MakerDAO, Aave, Compound, and other old DeFi protocols have also started targeting the RWA track, making the relevant concepts gradually popular. According to CoinMarketCap data, the total market value of RWA concept tokens exceeds $2.5 billion.
Currently, there are two main types of RWA mentioned, one is that on-chain assets are invested off-chain to obtain returns, and the other is that off-chain assets are brought on-chain and earn economic benefits. Realize the interconnection of on-chain and off-chain assets, increase liquidity while earning returns. Currently, the hottest concepts in RWA are digital dollars such as USDT, USDC, DAI, etc., which map US Treasury bonds to the chain and tokenize them.
Binance Research Institute’s classification of RWAs
What are the projects related to the RWA track?
MakerDAO: In 2022, the co-founder of MakerDAO proposed the MakerDAO Endgame plan, introducing some RWA assets as collateral for the stablecoin Dai. According to MakerBurn data, a total of 11 RWA projects have been introduced, with $2.48 billion in assets serving as collateral for MakerDAO, accounting for 53% of its total assets and contributing 53.9% of its revenue;
AAVE: AAVE launched the RWA market in 2021, allowing real assets to be collateralized and borrowed. Data shows that the Aave RWA market has a scale of only $76.65 million. However, with the launch of the stablecoin GHO, RWA will also be introduced like DAI;
Superstate: A new company founded by the founder of Superstate Compound, seeking to tokenize US Treasury bonds on Ethereum;
Centrifuge: Centrifuge is one of the earliest DeFi protocols involved in RWA and is the technical provider behind MakerDAO, Aave, and other protocols. Currently, Centrifuge has a total of 17 RWA asset pools with a total value of $230 million;
Ondo Finance: Ondo Finance is a decentralized investment bank that mainly invests in US-listed money market funds off-chain and cooperates with the decentralized borrowing protocol Flux Finance on-chain for stablecoin borrowing business. It launched tokenized funds at the beginning of the year, allowing stablecoin holders to invest in bonds and US Treasury bonds;
Maple Finance: Maple Finance’s mainstream business is lending/credit delegation to institutions. In April, it announced plans to launch a lending pool for investing in US Treasury bonds, expanding the model of collateralized lending with real assets;RealT: RealT is a compliant real estate tokenization platform established in 2019, which has handled tokenization of over $52 million in real estate and has more than 970 properties tokenized on the RealT platform;
Toucan: Toucan converts carbon credits into tokens, using DeFi to facilitate the trading of carbon credits.
The above is about the development roadmap of DeFi. It can be seen that the development direction of the blockchain industry is to continuously optimize and improve on the basis of its existing technology when it encounters bottlenecks or deficiencies.
Is DeFi really not working? In fact, LSD has already had a wave of explosive growth earlier this year, and the concept of RWA has also been constantly mentioned in recent months.