The history behind DeFi

As of 2021 we have seen an increasing interest in the crypto industry; hand in hand with globalization and the development of new technologies we witnessed the birth of Decentralized Finance, also known as DeFi, an alternative financial system that works by relying on cryptography, smart contracts and block-chain technology, taking away the need for traditional intermediaries and third-party management such as banks, exchanges, brokerages and governments. Today we will be taking a look at the history behind it and how despite its ups and downs, it has been growing and improving for almost 12 years with a total market value locked of $61.31B USD (DeFi Pulse 2021) at the date of writing this article.

The building blocks

Although there are no exact records on the origins of DeFi, we will highlight in this article some of the key events that made it possible. It all started with pseudonymous programmer Satoshi Nakamoto´s whitepaper: “Bitcoin A peer-to-peer Electronic Cash System” being released in 2009, addressing the need of “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”¹. This was a revolutionary idea considering how Bitcoin encouraged the creation of an efficient financial system based on transparency, that takes care of security for their users, is accessible for everyone with internet connection and works with cryptographic proof.

It is no secret that the traditional financial systems have many weaknesses: In the first place, there is a lack of transparency since central authorities maintain great control and surveillance over the market, financial figures and institutions can easily access users data, information about transactions, among others, being able to modify market conditions with relatively ease at will, in the second place it is proved that traditional banking systems have struggled to stay ahead with the fast-growing technological industry of our time, many banking operations require double verification, this means higher transaction fees and longer waiting times for transactions to be completed; third, traditional banking applications have proved to be vulnerable to hacking and cyber-attacks; fourth, human error is very common and reversibility of transactions reduces trust, and the list goes on.

Bitcoin brought new features that centralized financial systems cannot offer and its release set the foundation for a very profitable Crypto industry, nevertheless it had an important limitation regarding it´s simple and limited language called Script, which, given the simplicity of its structure was not enough to support the variety of transactions and services that every solid financial system needs such as borrowing, lending, trading, exchanging or funding.

The introduction of Ethereum

Photo by Jievani Weerasinghe on Unsplash

After the launch of bitcoin on 2013, a team of crypto enthusiast led by Vitalik Buterin had the idea of developing a new platform called Ethereum, said idea came to fruition with the announcement of a white paper titled “A Next-Generation Smart Contract and Decentralized Application Platform”, the project was officially launched the 30th of July 2015, two years after the publication of the white paper and one year after a successful 60 million ETH crowdfunding for a total of 31,500 BTC (Maker, 2021).Ethereum allowed people to write and run smart contracts under its own programming language called Solidity, making possible to build all kinds of Decentralized Applications where you can lend, borrow, exchange, save, earn interest, invest, fund, schedule payments, buy insurance and much more, this without the need of a central authority and backed up by block-chain technology.

The ERC20 standard Token (proposed by Fabian Vogelsteller on November 2015)² plays an important role within the crypto industry because it helps to promote interoperability upon decentralized ecosystem; Utilizing tokens as a virtual proof of value, this protocol provides a standard for developers to create ERC20 ETH native Tokens that will interact between wallets, smart contracts and markets.

The outstanding acceptance that Ethereum received paved the way for the great development of the DeFi industry. Considered one of the first DeFi projects, Maker is an open-source protocol with the purpose of allowing users to create permissionless decentralized loans utilizing cryptography and Ethereum´s Block-chain; led by Rune Christensen, Nikolai Mushegian and other outside partners with the foundation of MakerDao on December 2014. The team offered a private sale of its first governance ERC20 token “maker (MKR) in 2015 for the purpose of financing the project, nevertheless the official announcing of the Original Dai stablecoin system was in December 2017, “The white paper described how anyone could generate Dai using that system by leveraging Ethereum (ETH) as collateral through unique smart contracts known as Collateralized Debt Positions (CDPs)³. In other words; MakerDao is a decentralized automated protocol that enables users to generate Dai Tokens using ETH as collateral, this was later upgraded to Multi Collateral Dai on 2019 where Multiple Tokens besides ETH were accepted as collateral.

It is worth mentioning that DAO means Decentralized Autonomous Organization and DAI is the first stablecoin, an ETH token designed to stay at a fixed value even during hard changing market conditions, this can be done by tying the value of the cryptocurrency to a more stable asset, for example gold, diamond, petroleum, fiat or another crypto asset. In the case of DAI, it is a “decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar. Resistant to hyperinflation due to its low volatility, Dai offers economic freedom and opportunity to anyone, anywhere.” Stablecoin tokens like Dai, USDT, USDC, BUSD are greatly valued among Defi supporters, since they are the most reliable alternative that helps to avoid volatility problems, a common issue within the crypto market.

As well as DAO´s and stablecoin, borrowing and lending platforms have enjoyed wide acceptance between crypto users all over the world, thanks to DeFi, Block-chain and smart contracts it is possible to automate projects like Compound or Aave allowing users to earn interest payment in lending activity, at the same time they circulate their own token currency that can be exchanged between savers and spenders as well as with other platforms (Usman W, 2021).

Raising funds

Photo by Diane Helentjaris on Unsplash

A remarkable part of DeFi are the ICO´s (Initial Coin Offering) and IDO´s (Initial Dex Offering), they are a decentralized version of an IPO (Initial Public Offering), roughly speaking it is the raising of capital for a new project; the company announces a smart contract on a whitepaper explaining details of the business proposal, usually including important dates, how much capital will be needed and how is going to be invested, after that the company leads a crowd sale of their own tokens that users purchase in return for non-equity utility tokens. The use of ICO/IDO is really favourable for upcoming projects and companies because enables them to receive great amounts of capital with ease and little regulation.

Since the ICO mania of 2017 many great crypto projects have performed ICO´s being able to obtain capital and to successfully develop several kinds of business ideas generating profit for both investors and development teams. Despite how useful ICO´s are, many projects have unfortunately turned out to be scams, in the way that they showed poor or even failed performances, besides, many business ideas came out to be just a pretext to betray the trust of users by receiving their investments with little or even nothing to offer in exchange. Fake ICO offerings remains a matter of care and it undoubtedly affects trust within the crypto Industry. Crypto community play an important role for the reason that they can identify risk factors or even bugs in programming code and spread information in order to prevent users from scam accounts or projects. Therefore, it is recommended to develop a serious market research before making any crypto investment decision.

By the year 2018, the emerging DeFi ecosystem showed to be an ongoing business with a large number of Decentralized applications launching on Ethereum, among which we can highlight Decentralized Exchanges such as Uniswap, built on the concept of liquidity pools and automated market makers, enabling the exchange of multiple ETH based tokens without the need of financial intermediaries and rewarding their liquidity providers with special automated fees.

Along with Uniswap, many successful DeFi applications were launched on Ethereum main-net between 2018 and 2019; as the example of Synthetix , an open and permissionless protocol that makes possible the emission of on-chain synthetic assets that can interact with the market as they represent the value of crypto and non-crypto assets.

In May 2020 with the launching of COMP tokens by Compound as a form of rewarding interest rates to their users the concept of liquidity mining and Yield farming was introduced, where investors stake or lend crypto assets, leveraging liquidity pools and expect positive return rates. The arrival of this kind of decentralized financial applications added complexity to the crypto the market.

Photo by Cytonn Photography on Unsplash

History confirms that decentralized finance is a more affordable, open source, community controlled, secure, trustful and transparent system than the archaic central systems commonly used. Billions of dollars flowing through Decentralized ecosystem corroborate how supported this market is, with great variety of interesting and innovative business proposals now generating profit and many more to come like for example our project xVORTEX ,with a mixed investment strategy, looks like a bright future with awesome opportunities for this industry to continue developing profitable applications. If you want to stay updated with the latest crypto news and find more detailed information about out project follow our social media.

References

  1. Nakamoto,S. (2008). ´Bitcoin: A Peer-to-Peer Electronic Cash System´, open-source MIT license. Pp 1–2 , https://bitcoin.org/bitcoin.pdf
  2. Ethereum, ERC20 token standard. (Version 11 April 2021). https://ethereum.org/en/developers/docs/standards/tokens/erc-20/
  3. References , 3 and 4: Maker DAO. The Maker Protocol: MakerDAO´s Multi Collateral Dai (MCD) System. https://makerdao.com/en/whitepaper

Telegram | Twitter | Discord | Reddit | GitHub | LinkedIn

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store