A brief history of DeFi by Ti Capital

‘Trusted Third Parties are Security Holes’; it has been 2 decades since Nick Szabo came up with the concept of ‘smart contract’ in the nineties of the 20th century. However, it was not put into practice regarding the circumstance at that time until in 2013, Ethereum whitepaper mentioned that: Ethereum had been designed to be an alternative protocol (of Bitcoin) in order to cater the rapid expansion of decentralized applications. It enables people to create ‘contracts’ and decentralized applications with the built-in fully fledged Turing-complete programming language. Ethereum protocol realized functions that far more than monetary and the idea of ‘DeFi’ also took shape at that time.


The following article will describe a brief timeline of DeFi which developed from nothing base on the figure above.

  1. 2017-2018 Established projects made a figure
    • 12 MakerDao launched——Stable coin of DeFi
    • 9 Compound launched——The former King
    • 2018.11 UniSwap launched——AMM overturns traditional trading mode
    • 11 Synthetix launched——Connect to the real world
  2. 2019-2020 New games on DeFi

2.1 2019.1 WBTC launched——BTC opens the door

2.2 2019.7 Chainlink launched—The bridge of real world data

2.3 2020.1 Aave Launched——Flash loan: No beginning without ending

2.4 2020.312——Systematic ‘Stress Testing’

2.5 2020.6 Yield farming——Unstainable hot spot

3. The future of DeFi

3.1 Liquidity staking——Unleash liquidity of staked asset

3.2 Derivatives——Might be the next boost

3.3 New things——Satisfy needs in a blockchain way


  • 2017-2018 Established projects made a figure

DeFi also know as decentralized finance. Despite its small scale compared to traditional finance, things in traditional area have been mapped on Defi gradually, becoming a finance LEGO on blockchain. It had been 5 years since the beginning of Defi in 2013 to 2018 when the founder of Dharma Labs came up with the noun ‘Decentralized Finance’ and the period was also considered the infancy of blockchain.

  • 12 MakerDao launched——Stable coin of DeFi

USDT was launched in 2014.11 by Tether, a centralized entity. Users can exchange USD to USDT at an 1:1 ratio. The so-called 100% credit endorsement and ‘Completely Transparent’ make USDT the most mainstream stable coin adopted by exchanges. However, Tether did not publish its audit reports since 2018.

Then, the first DeFi project MakerDao was launched in 2017.12, which is meaningful. Besides functions that the centralized stable coin USDT provides, Dai also has the following features:

  • Against hyperinflation: Considering that the inflation rate in Argentina is as high as 37.2%, Dai, as a stable coin which pegged to USD, has been adopted by many Argentineans as a tool to store the wealth.
  • Alternative financial channel: Based on the decentralized feature of DeFi, users can transfer, trade and even make payment without owning a bank account.

Besides the features mentioned above, Dai can also provide conveniences such as resistance to censorship, 7*24 market and tax avoidance. In another word, Dai can do whatever USDT does, and it is capable of doing what is impracticable by USDT, which is decentralized, publish audit report, completely transparent and online checkable. So far for Dai, it is not only the pricing currency of many exchanges, but also stable means of payment for many Dapps. As the first project in DeFi ecology, Maker built a solid foundation that does not rely on bank accounts, nor credit ratings and even USDT. DeFi has its own stable coin, and this is the reason why Maker always ranks first in Defi TVL.

The non-transparency of USDT can provide more liquidity in some circumstance:

The minted volume of USDT and Dai is shown as following, and there are hundred times of difference between their circulation. So, what makes USDT Too Big To Fail even though it has so many problems? A Swedish economist Bengt mentioned that in his article 《Understanding the role of debt in the financial system》: the stock market (token market) is aimed for risk sharing and the monetary market (stable coin market) is providing liquidity. The point is that the monetary market is born with non-transparency and non-transparency can provide a better liquidity in some circumstance. For instance, online checkable, anonymous etc. expose each movement on the chain to all players in the world, which results in an increase of potential risks. Nevertheless, non-transparency is like a black box who knows nothing. And this could be considered as an insurance of safety. Tether hasn’t published any audit reports for years and this seems like exactly the reason why it is still strong. Maker, who is regarded as ‘the central bank of DeFi’, depends on the development of DeFi to some extent, yet the future of DeFi may not rely on Dai.


  • 9 Compound launched——The former King

Compound was launched at 2018.9 as a decentralized ‘commercial bank’. Suggested by its name, people get to know that it generates interest in a compound way instead of single interest. However, what people might not know is that Compound calculates interest in a period of roughly 13 seconds, which is the time Ethereum produces a block. I believe that the top concern of users about a lending platform is its interest rates. Normally, interests among countries differ largely (as follows). But Compound provides a deposit interest rate that is significantly higher than the traditional ones.3

Source: trading economics

Inspired by the heat of Compound, we conclude some factors that make a DeFi project qualified as follows:

  • Permissionless
  • No Counter-Party Risk
  • Capital with a trusted third party

And if we apply these factors to Compound, we can see that ‘Permissionless’ means no KYC (Know Your Customer), which might be a good choice for the 1.7 billion people that do not have access to bank service in the world. Secondly, the counter-parties of users are smart contracts, and each movement on chain is traceable due to the transparent feature. Finally, users’ capitals are on chain instead of being submitted to the project team. 3 years have passed since Compound first launched in 2018. Early at that time, Compound, known as the first commercial bank, was good enough to attract a couple of big names investors like Coinbase venture. In fact, it keeps Compound being the top DeFi lending platform for years, until Aave was launched. After a comparison, it is obvious that Compound is crushable.

  • 2018.11 UniSwap launched——AMM overturn traditional trading mode

Exchanges play the role of the medium between investors and the secondary market including stock, future and option agreements. The solid foundation laid by Ethereum enables DeFi to grow at a rapid rate, and crypto currency exchanges are responsible for releasing the passion of investors.

A trading system with No Oracle

UniSwap was launched in 2018.11 and we can see that UniSwap far exceed its competitors and became the top DEX in 2020Q3. By abandoning the order book system, matching buy and sell orders and waiting a long time for the limit order to close will no longer become problems. AMM makes pricing available based on a simple formula instead of taking an oracle. For users, there are no counter-party risks as people deal with the capital pool, where capitals are on chain, so things like the owners of exchanges run away will never happen. All these are unachievable for a centralized exchange.

Extreme simple virtual monopoly

UniSwap provides a platform to satisfy long-tail market trading demand in a prefect transparent and permissionless way. Without matching orders and no listing threshold increase the trading extent in an invisible way. Uniswap can be considered as the first one to eat crab and thus results in a monopoly virtually. It is the ample liquidity that keeps its top position. And in another word, it might decline if liquidity turns to other platforms. Why am I mentioning this? Because the problem of Ethereum is known to everybody and this makes Uniswap to stand out. Extremely simple, low exposure to hackers and low gas fee become vitally important.



The uncertainty of UniSwap is the certainty of SushiSwap

Along with the expire of UniSwap farming, there were uncertainties for the community to vote for restart farming, causing a large amount of capital flows out. The price of Sushiswap token increases by around 30% in Nov 15. In a word, the uncertainty of UniSwap is the certainty of SushiSwap. For Sushiswap, in order to attract those capital outflow from Uni, it turns up the farming reward for USDT/ETH and WBTC/ETH etc. It was obvious that the daily change in TVL total value locked decreased by 43.99% for Uni and increased by 69.14% for Sushi. But there was no significant decrease in DeFi TVL, which means that there was no large capital outflow from DeFi (by 11.25).

  • 11 Synthetix launched——Connect to the real world

From stable coin to lending platform and DEX, it shows an entire new financial world who lacks underlying assets like stocks, commodities and other derivatives. Users need to turn to traditional exchange platforms to trade those underlying assets and need to bear the supervision based on their locations. However, with the launch of Synthetix, it gets through the traditional markets. Likewise, the project is decentralized and permissionless.

Increase diversity of the portfolio

As the top derivative project, it can be considered as a parallel world which takes underlying assets from the traditional world to the on-chain world. There is no doubt that it realizes a diversification of portfolio, investors can hold iBTC to hedge a drop in the price of BTC, meanwhile retaining a BTC position on hand. Similarly, investors can hold stocks like APPLE in order to diversify crypto currency portfolios, based on the low correlation between cryptocurrencies and traditional underlying assets. As shown in the following figure, a low correlation makes sure the effectiveness of portfolio. It is quite important to lower the correlation in order to diversify risks.


  1. 2019-2020 New games on DeFi

It is obvious that 2017-2018 was the time when projects drive the development of ecology, mapping the traditional finance onto blockchain along with lending, DEXs, derivatives, stable coins and pegged currencies. These projects made a complete underlying foundation laid. As for 2019-2020, new games like flash loan, yield farming and liquidity attack derive from the foundation built. These challenger projects that the traditional world has never had are driving the development of DeFi.

2.1 2019.1 WBTC launched——BTC open the door

Obviously, DeFi has become one of the most popular ecology. Dapps skyrocket over the years since the end of 2017 (as shown in the following figure), and many of them are of high quality. A majority of DeFi projects are built on Ethereum, and reason is revealed in Ethereum whitepaper that came out in 2013. WBTC was launched in 2019.1 as the first ERC-20 token pegged to BTC, and the exchange rate is 1:1. BTC is the cryptocurrency with the highest market cap all the time, but due to the interaction, there was no direct way to connect these two big whales. WBTC then came up to bring BTC’s liquidity onto Ethereum ecology.

Source:State of DAPPS

2.2 2019.7 Chainlink launched—The bridge of real world data

Smart contracts can only acquire data online in the beginning. As the demands for the interactions between on-chain and tradition markets increase, Chainlink launched in 2019.7 as an oracle DeFi project.

As the top one market cap DeFi project, Chainlink not only partners with tradition institutions like Google cloud and Oracle, but is also the oracle of many top DeFi projects like Aave, Synthetix and Yearn Finance. In 2020.11.26, 90 million assets on Compound was liquidated, because it captures the price index on Coinbase and OKEx instead of using oracles. On contrary, Aave partners with Chainlink so it has a much lower liquidation volume compared to Compound.

Challenger NEST takes shape of data directly on-chain

Miners provide prices quoted with commissions and make data directly formed on chain. The cost of malicious quote increases in an exponential way due to the quote volumes. Incentive encouragement motivates providers to provide data that is reliable and of high quality. Like Vitalik stressed, oracles need to take care on capturing truthful data and Nest is fitting his point.

2.3 2020.1 Aave Launched——Flash loan no beginning without ending

It is 2020 and DeFi has already taken shape. There are many projects in the ecology hence bring up more intense competitions. Challengers try to share the market, for instance the launch of Aave as a challenger of lending platform in 2020. Many people consider Maker as a lending project but in my opinion, Maker can be considered as a lending project but it is not suitable to compare with Compound and Aave. After all, the essence of the stable coin Dai is lending over-collateralizedly.

The code says: there is no beginning without ending

The revolutionary financial instrument flash loan originates from Aave. I called flash loan an instrument because it is a derivative instrument like futures, option agreements instead of a complete profitable strategy. ‘No beginning without ending’ means that what users need to do is to repay the uncollateralized loan and interest in 13 seconds(which is the time that an ethereum block is produced). Any incomplete code logic or failure in repayment will cause the flash loan NEVER HAPPENED. Flash loan created by Aave can be regared as a tool that overturns the traditional cognitive——Basically, there is no ending without a beginning. But in terms of flash loan, there is no beginning without ending. It is quite interesting that though Defi is mapped from traditional financial market, it is starting to create something new and impossible in traditional fields based on the innovative technologies from blockchain.

The law of the jungle is cruel but its normality of development

There are two thresholds need to be mentioned:

  • Users need to have knowledge of solidity to perform flash loan
  • The key of a successful flash loan is to dig arbitrage opportunity

For instance, the bug of bZx is that it allows a lack of collateral and this is the point attacked by hackers. The most common use of flash loan currently is arbitraging. Arbitrage opportunities are everywhere regardless of the amount. As a tool to remove difference in prices, flash loan can be considered as a big move to promote ecological development. Although flash loan hackers attacks happen, there is nothing wrong with the tool. Moreover, it helps to eliminate those bad smart contracts. The law of jungle is cruel, but it is the normality of development.

It is obvious that Aave is a successful challenger. It provides stable interest rate for user to have multiple choices and an innovative financial tool that not mapped from traditional finance. As a lending platform, one thing that users care about is the interest rate. Aave offers better interest rate compared to Compound both in borrowing and lending. Aave has more functions compared to Compound, but complex means error prone and this might be the only thing that can be defended for Compound.

2.4 2020.312——Systematic ‘stress testing’

Ever since the financial crisis in 2008, monetary policies like QE move yield curve rightward, which means that people need to bear more risk in exchange for same rewards. Investors turn to safe-haven assets and this always results in a liquidity died-up. US stock market was fused twice during the week of 12th Mar 2020. The US federal reserve and BOE cuts interest rate, causing fear prevailing in the whole world. CDP liquidation results in a series of operation of MakerDao like debt auction, decrease DSR etc.

As the second largest market cap, ETH price dropped by 40% in a single night. ETH selling pressure further accelerates liquidity to die up, crashed market will expose the deficiency of the ecology which is thought-provoking and results in further adjustment. Although DeFi is still at an early stage, it is performing well after a systemic ‘stress testing’. BTC and ETH recovered to their price level 3 month afterwards. BTC can be viewed as an investment grade underlying asset, digital gold, haven asset. However, it did not play as a safety asset during the severe global recession. The following figure shows the performance of gold during each extreme event, accompanied with the increasing acceptance of cryptocurrency. Compared with gold, BTC still has a long way to go.

source:GF Securities

2.5 2020.6 Yield farming——Unstainable hot spot

Someone said that yield farming pushed out by Compound is the rocket fuel of DeFi. Staking and waiting for the coins to realize in value, these 2 steps give Compound a qualitative change as the following figure mentions.


An agonal project boosts to a 70% lending market share in June, Compound was not the first one to come up with the idea of yield farming, but how can Compound end up with a rocket fuel? The reason is that users found the arbitrage model of BAT. The farming reward allocation is designed to be correlated with accrual interest rate which means that the more interest paid or received, the more COMP users will receive. During that time, BAT’s borrowing and lending rate was 23.77% & 31.88% respectively compared to around 0.06% and 2.75%——from 2020.5.23 when BAT first launched on Compound to 6.18.

  • Distort the origin interest rate, squeeze out loyal users
  • No real value support
  • The value can last but farming cannot

Yield farming is just a way, a tool to attract users during the initiate of projects. The point is that if there are things to retain users after the termination of farming, the interest rate BAT offers attracts numerous speculators, squeezing Compound’s loyal customers out. The yield was diluted when more speculators came in and for those speculators, they can turn to other places for a higher yield. The speculators attracted by higher yield and distorted market equilibrium are unsustainable. There are nick names for the projects: Maker——stable coin, Aave——flash loan, Compound——farming. There is nothing more to say for Compound except farming. In another word, each project can do farming but it cannot last without real value in support.


  1. 3. The future of DeFi

3.1 Liquidity staking——Unleash liquidity of staked asset

In order to keep the safety of platform, most of the DeFi projects adopted a over-collateralized way to save 150% in order to make a 100% loan. It has been a huge amount since the DeFi TVL step in a 10 billion volume. However, staked asset will lose liquidity and then lose value although people lend money for specific use like farming. For the problems of PoS, Kira is designed to unleash the liquidity of staked asset, supporting all crypto currency and each node enjoy the same voting power.

  • Obtain liquidity through a derivative way
  • DEX supporting all tokens

There are locking periods for different projects, some of which can be tens of days or even several months. It should be optimism to the future of liquidity staking as a new concept in blockchain. For DEXs, although they are more simple and transparent, they can only support ERC20 tokens which always result in a restrict on trading extent. Kira’s derivative trading system supports all tokens and thus increases the liquidity and capital utilization rate.

3.2 Derivatives——Might be the next boost

There is a preconceived phenomenon in this industry, derivatives field is still in a small scale but with a high growth rate. It is one of the most important field but with no significant growth. Many derivatives tradings are concentrated on BTC and ETH. And for those many coins, though there are derivatives like futures and forward agreements, it is hard to matching orders and attract users to boost liquidity.

  • A friendly UI
  • The setting of maturity and price etc.
  • Liquidity and matching efficiency

There are many derivative projects covering futures, options and swaps for underlying assets like interests and foreign exchanges. But they have problems like if DeFi can gather option sellers to a capital pool to smooth the potential loss. And for exchange platforms, if the project can attract users and enough liquidity, how to pricing and how to prevent oracle attack remain unsolved. Whether the trillions traditional derivative market can shine in a DeFi way is worth looking forward to.

3.3 New things——Satisfy needs in a blockchain way

DeFi has developed rapidly in recent years and many of them are designed to solve the pain points of the market, users’ demands and fancies of developers. Along with the infra tending to be more complete, the future of DeFi might be new games on any fields with specific needs of the market. To fix blockchain problems in a blockchain way should be the future of DeFi.

  1. Conclusion

Valuable projects are emerging endlessly these years, which shows that DeFi is a long-term value return instead of a speculation like ICO in 2017. People can bind bricks aiming at the pain points, not relying on a third party to satisfy what the market needs in a permissionless way on Ethereum. With the market expansion, there will be more eyes accompanied with problems like censorships, compliance and anti-money laundry. BTC has been increasing rapidly in the past few weeks. Is the lead of UniSwap and Aave in the DeFi market a super drop bounce OR is it reflecting the value of those top projects? It is worth reflecting that if 312 will come again. Price moves around the value, but value is different from everyone’s perspective. Quote: ‘Don’t trust, Verify’.



2020 DeFi行业研究报告 Part1. (2020年11月). URL: TokenInsight:行业研究报告Part1.pdf

CapitalHillChain. (2020年10月). URL: ChainNews:

EthereumGroup. (2013). ethereum whitepaper. URL:

Gains in Financial Inclusion, Gains for a Sustainable World. (2018年5月18日). URL: The World Bank:

tradingeconomics. (2020). 检索来源: tradingeconomics:

潘超. (2018年5月). 干货 | 关于 USDT 和稳定币,大多数人都错了. 检索来源: 加密经济研究院:

Elina is New York based writer and media consultant. Currently she is involved as an advisor in several ICOs. In addition to her professional interests, she loves jazz, modern art, coffee, and yoga.

scroll to top